How Inflation Is Not As Bad As It Seems

A post about inflation over at Little House in the Valley compared the cost of several goods in 1971 to 2011 and determined that inflation had increased at a rate much higher than the average salary increased. I do not doubt that this is true but I don’t think that inflation is not as bad as it seems.

The most expensive item on the list of goods was a house. House prices have increased dramatically but a 1971 house isn’t the same as a 2011 house. According to the National Association of Home Builders, the average home size in the United States was 2,700 square feet in 2009, up from 1,400 square feet in 1970. Houses have almost doubled in size which accounts for much of the increase in price. Modern homes also have a lot more amenities than 1971 era houses. For example,it wasn’t uncommon for a house to not have central air in 1971 but it is rare for a house to be built without central air now. There wasn’t nearly as many granite countertops back then either. A new house today is a lot more house than a new house was in 1971.

The next big ticket item is a car. I actually owned a circa 1971 car once and I can easily say cars are much better today. My 1971 car had an AM radio – not an AM/FM radio – just an AM radio. It got about eight miles per gallon and certainly didn’t have an airbag. The average 2011 car is safer, more fuel efficient, and much more reliable than the average 1971 car. Once again the 1971 product and 2011 product aren’t that comparable because the modern product is far superior.

Movies costs more but we now have the option of easily watching movies on DVD or Blu-ray in the comfort of our own home. You can get them for as little as a dollar at Redbox or with promotions you can get them free. You can also get free movies from your local library or at sites such as Hulu online.

Stamps have gone from eight cents to forty-four cents but that is still a bargain. There isn’t much need for stamps today since letters have largely been replaced by email and billpay. In 2011 the average person doesn’t need to spend much money at all on postage.

I won’t go into details on every item but here in the U.S. gas is cheap and food is cheap too. For tuition it looks like inflation really is as bad as it seems but maybe someone can explain how the tuition inflation is justified.

There is no doubt we have experienced a lot of inflation from 1971 to 2011 and salaries haven’t kept pace. Inflation isn’t as bad as it seems though because the 1971 items aren’t really comparable to the 2011 versions.

20 thoughts on “How Inflation Is Not As Bad As It Seems”

  1. Andy,

    I understand your points, but don’t agree with your analysis or conclusions. I think you are using improved standard of living argumnet to disprove the occurence of inflation.

    I like to compare things that have not changed as much. For example, a gallon of gasoline (can’t blame the price increase on those extra additives), a gallon of milk (not much change in cows), a dozen eggs (basically the same hens) and a loaf of Wonder Bread (my favorite white bread). Those comparisons lead to a higher inflation conclusion.

    Anyway, I think the Fed is under reporting inflation for their own benefit, i.e. to keep interest payments and COLA payments low :-)

  2. I agree that your conclusions are invalid. Using your argument, then salaries should have climbed even more than they have and kept pace. Why is that? According to the US Bureau of Labor and Statistics, productivity of the average worker increased 1.1% annually from 1973-1979, 1.4% annually from 1979-1990, 2.1% annually from 1990-2000, 2.5% annually from 2000-2007, and 2.4% annually from 2007-2010.

    Using your logic and 2% average salary growth over those 40 years yields about $23,500. At the same time, the work force has become more educated so salaries should be higher still since the value of a college educated worker has traditionally been higher than a high school educated worker. That should put the average salary at around $30,000 meaning that salaries have failed to keep pace by a wide margin. It seems like employers are getting a great deal!

  3. I’ll remind myself of this every time I wince at the grocery store…I don’t know about your neck of the woods, but in Colorado, food prices have generally gone up 10-25%…or more. Fresh peaches are a good example. Last year, they were at what I then thought was an outrageous price in season — $1 a pound. This year, they’re $3 a pound regular price, and $1.99 a pound “on sale.” Ouch.

    So good luck on this idea, but practically speaking, I don’t think you’re right. Bargains are still to be had out there, but you must work very hard to find them.

  4. One of the first cell phones in the 1980’s ( the one that Gordon Gekko had in the movie Wall Street) cost about $4,000. Now, even the coolest phones with all types of apps ( and games like Angry Birds) cost only a few hundred buck’s at most. My friend also likes to spend on computers as well.

    Apple computers ,cost $2500 for an Apple II in 1980s :oldcomputers.net/macin… I would say a desktop computer costs less today.

    If I were an active investor, I would have spent $40 in brokerage commissions in order to purchase 25 shares at $40/share or $1000 worth of stock in 1980’s. Now, I could do all of that for $3 in total.

    So I would say, we are actually experiencing deflation. What inflation are we talking about?

  5. Excellent article. I marvel at how clothing costs have actually depreciated over time with the advent of global sourcing. I remember paying close to $30 for a sweater many years ago, and today I have purchased lovely sweaters for much less!!!

  6. Inflation is much worse than stated, unless you don’t buy gas, food, or pay rent and taxes, which the government seems to find ways to omit from their formulas.

  7. I agree with 101 Centavos that inflation has had a drastic effect on families. A house that was built in 1970s with no modifications whatsoever is worth a lot more although it’s no longer a new house :-) A 1970 house in the year 2011 is definitely much worse than a brand new house in 1970.

  8. Long distance calls are cheaper, but the typical family’s total communications expense (home phone, cell phone and internet) is many, many times greater than it was in the early seventies. That’s not deflation but rather the cost of long distance being spread out over many more users.

    Having said that, we get a LOT of communications that wasn’t possible in the seventies.

  9. I had a moderate income when I went to work in the seventies, probably the equivalent to $18-$20 today. But, gasoline cost about the same percentage of an hourly wage as it does today. I agree that much of the strain on our economic condition is in the number of things that we consider to be essential today that weren’t even available or thought of then.

  10. Prices have risen faster than incomes despite large increases
    in productivity.
    As you noted, education costs have skyrocketed.
    Also, health care is much much more expensive.
    In 1978 I could see my physician for $14 (total cost).
    Cars are better made, but the price of a used car has risen
    substantially over the past decade.
    Houses built in the 1960s-70s were smaller and had
    somewhat fewer amenities, but they tended to be
    better constructed (with the exception of insulation).
    Inexpensive rentals were cheaper and in greater supply.

    I think you make some valid points.
    We have to be careful not to compare apples to oranges.

  11. Good points on how productivity increases mean that many goods are cheaper today. However, how much cheaper could they be then again if it wasn’t for inflation diverting income to those who receive the new money first? This is the real harm of inflation. If it affected everyone equally, it would just balance out… but it doesn’t.

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