Where is Inflation Heading?

Written by Wealth Effect Blogger

Predictions about what inflation will look like in the near future range from those who believe prices and salaries will remain flat to those who believe hyperinflation is just around the corner. Just drastically different opinions about inflation are possible when there are drastically different ways inflation is currently impacting our lives.

Click on graph for larger image.

This chart shows the inflation rate since 1997 in three parts of our society: Service Sector (think medical care, teaching, auto-repair, cooking or any other services people provide), Non-Durable Goods (think food, energy or any other product that is not designed to last a long time) and Durable Goods (think computers, washers, TVs, furniture).

Over the past 15 years Service Sector prices have risen about 75% and Non-Durable Goods are up about 55%, but Durable Goods prices have fallen steadily and are now down a total of 12%.

The rise in the cost of services accounts for most of the 90% rise in nominal personal income over the past 15 years.

What we see here is arguably the most incredible increase in workers purchasing power in the history of the world, notwithstanding the unprecedented dip associated with the Great Recession. This is evident in the exponential curve below:

Compared to 15 years personal incomes have more than doubled relative to the price of durable goods. Put another way, work now buys more than twice as much in the way of durable goods as it did 15 years ago. Of course, this commentary does not address how the income and work are distributed: both are more unequal today than 15 years ago and millions today don’t even have work.

At the same time, however, it now costs California employers 55% more to hire that minimum wage worker ($5.15 on September 1, 1997 vs. $8.00 today) and it costs us all about three times as much to fill our cars with gas as it did 15 years ago.

The government is reporting the average rate of inflation across the entire economy is running at about 2% but I view that number like an ocean that has powerful and sometimes conflicting currents just below its seemingly steady surface.

Bottom line, labor has become a whole lot more valuable and expensive than things, especially things that can be mass produced by machines instead of people.  But labor has lost ground when it comes to buying some services (like health care, see comment below, and some commodities (such as petroleum based fuels).

Health care expenditures have way more than doubled over the same time period.  From 1997 to 2009 health care consumption increased by 118%, according to the U.S. Census Bureau.

Where is inflation heading?

Inflation depends on what is being measured.  I am reminded of something I have seen stated several times:   There is no real inflation problem if you don’t eat, get sick or drive to work.

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