It’s still too early to tell if the Federal Reserve has successfully tamed the latest (2021-24) bout of inflation and its apparent plan to start bumping up interest rates a bit may avoid a “hard landing” or a “recession.”
This era of rising prices scared a lot of folks. Inflation over last 3 years has averaged about 5%.
The last time it was over 4% was 1991, the last time it averaged over 5% was the great bulge from 1969 through 82. If people’s real experience of inflation doesn’t start until they’re 18 (i.e. their parents dealt with it, but the awareness for teens was pretty small) then about 2/3 of the population today doesn’t really remember even the 1991 bump and less than a quarter of the population dealt with the great bulge.
So, granting the usual adjustments for fading memories from 30-55 years ago, our society had pretty much forgotten what it was like to face the disorientation of shifting prices. We had gotten pretty used to price changes being isolated by sector (gas, real estate) and overall levels only nudging up by what seemed to be small and tolerable increments. In other words, prices were a source of general psychological stability.
A burst of general inflation knocks all that off-kilter. It makes it hard to figure out what’s worth what. I, for one, felt regular sticker shock going to the market where a pack of sausages moved from $3.99 to $5.99. (You will have your own examples.) Here in San Francisco, restaurant prices have moved similarly: a $30 steak dinner is now $40, and a plate of pasta goes for $25-30. Ouch!
In every such situation, every consumer asks: “Is it worth it?” (Relatively-) stable prices make it easier to make that assessment. When I go to that restaurant, I gasp/gag and try to wrap my head around the menu prices. Perhaps I’m just stuck in my memories of past prices, where a hamburger should be $1.95 (ok, …$4.95) not today’s $15/$18/$22.
At least a hamburger is (pretty much) a hamburger; if we leave to the side the fact that we now get a “brioche bun,” organic beef, and aged cheddar, instead of the classic bun and a slice of Kraft “American” cheese.
There is another aspect of inflation that is a bit more buried and hard to parse out. It shows up more in technology-driven products, but it really permeates many things that are purchased and consumed at ever-higher prices, but which actually deliver more value than before.
Take cars. The average price of a new car this year is about $49k. It was about $30k in 2012 and well under $10k when I got my first new car in 1976. Has car inflation gone up 800% in that 48 year period? Or, should I consider the improved gas milage? Reduced maintenance costs? Vastly improved safety features? Not to mention the comfort/entertainment bells-and-whistles. If we think of the car not just as a car, but as a transportation service provider, the fact that I can go many more miles without worrying about an accident or break-down is worth a fair amount, but that increased value doesn’t show up in the inflation figures.
This phenomenon of greater value/productivity shows up in lots of place, but it’s most visible in high-tech. In 1984, the price of a Mac was $2500 (that was the year of the famous Apple Orwellian advertisement). It was clunky (remember floppy disks!), slow, and its (then) breakthrough speed and storage now seem pathetic compared with today’s iMac with a 24” screen, 2Tb of storage and a gazillion apps that costs…$2500. The difference is not just that nominal inflation means that we’re now paying about 40% of what we paid before, but we’re getting so much more (not to mention reliability and ease of use). So, what is inflation anyway?
The Labor Department, which produces the inflation statistics for our economy (the Consumer Price Index or “CPI”), does make some modification for this—kind of. It’s called the “hedonic quality adjustment” and it bakes into the numbers the physical changes driven by technology (“Gee, all TVs now have a “picture-in-picture” feature, and that’s worth something, so the nominal inflation is a tad less.”) The problem with this is that its mechanical and material; it still doesn’t reflect benefits like peace of mind about the quality of car tires or your phone’s ability to track your children.
Jumping out from this micro-economic example, we can ask the same type of question about productivity and value at the societal (macro-economic) level. What consumers value change and the capabilities and effects of products and services change; yet economists value their continuous series of data that ignore attributes that cannot be reduced to a numerical/financial parameter. The media jump on easy to communicate numbers and we all “consume” this data to assess whether we are better or worse off. Economists pretend that their models capture a “real” picture of society. Policies get made, production and hiring and spending decisions get made, people vote—all based on these (what can only kindly be called) “fictions.”
“There are three kinds of lies: lies, damned lies, and statistics.” –attributed to Mark Twain, who attributed it to Disraeli.
“Any firm that hires an economist has one employee too many.” –attributed to Warren Buffet.
We may all perhaps be forgiven for being lost in this “Alice-in-Wonderland” portrayal of the state of the world. We’re all well indoctrinated into the culture of social science and its epistemology. We take comfort from the apparent certainty of numbers and the stack of Ph.D.s behind them. It seems like it’s off twelve ways from Sunday. How to make sense of it all? I wish I knew. Is that $22.95 organic/brioche burger really worth at that café ten times a McDouble burger from the Golden Arches “Dollar Menu” today? Is it worth 70 times the 28¢ it cost to get a McD’s burger in 1974? We don’t need the conspiracy theorists and tin-hat crazies to be at least aware of what we’re being fed.
This era of rising prices scared a lot of folks. Inflation over last 3 years has averaged about 5%.
The last time it was over 4% was 1991, the last time it averaged over 5% was the great bulge from 1969 through 82. If people’s real experience of inflation doesn’t start until they’re 18 (i.e. their parents dealt with it, but the awareness for teens was pretty small) then about 2/3 of the population today doesn’t really remember even the 1991 bump and less than a quarter of the population dealt with the great bulge.
So, granting the usual adjustments for fading memories from 30-55 years ago, our society had pretty much forgotten what it was like to face the disorientation of shifting prices. We had gotten pretty used to price changes being isolated by sector (gas, real estate) and overall levels only nudging up by what seemed to be small and tolerable increments. In other words, prices were a source of general psychological stability.
A burst of general inflation knocks all that off-kilter. It makes it hard to figure out what’s worth what. I, for one, felt regular sticker shock going to the market where a pack of sausages moved from $3.99 to $5.99. (You will have your own examples.) Here in San Francisco, restaurant prices have moved similarly: a $30 steak dinner is now $40, and a plate of pasta goes for $25-30. Ouch!
In every such situation, every consumer asks: “Is it worth it?” (Relatively-) stable prices make it easier to make that assessment. When I go to that restaurant, I gasp/gag and try to wrap my head around the menu prices. Perhaps I’m just stuck in my memories of past prices, where a hamburger should be $1.95 (ok, …$4.95) not today’s $15/$18/$22.
At least a hamburger is (pretty much) a hamburger; if we leave to the side the fact that we now get a “brioche bun,” organic beef, and aged cheddar, instead of the classic bun and a slice of Kraft “American” cheese.
There is another aspect of inflation that is a bit more buried and hard to parse out. It shows up more in technology-driven products, but it really permeates many things that are purchased and consumed at ever-higher prices, but which actually deliver more value than before.
Take cars. The average price of a new car this year is about $49k. It was about $30k in 2012 and well under $10k when I got my first new car in 1976. Has car inflation gone up 800% in that 48 year period? Or, should I consider the improved gas milage? Reduced maintenance costs? Vastly improved safety features? Not to mention the comfort/entertainment bells-and-whistles. If we think of the car not just as a car, but as a transportation service provider, the fact that I can go many more miles without worrying about an accident or break-down is worth a fair amount, but that increased value doesn’t show up in the inflation figures.
This phenomenon of greater value/productivity shows up in lots of place, but it’s most visible in high-tech. In 1984, the price of a Mac was $2500 (that was the year of the famous Apple Orwellian advertisement). It was clunky (remember floppy disks!), slow, and its (then) breakthrough speed and storage now seem pathetic compared with today’s iMac with a 24” screen, 2Tb of storage and a gazillion apps that costs…$2500. The difference is not just that nominal inflation means that we’re now paying about 40% of what we paid before, but we’re getting so much more (not to mention reliability and ease of use). So, what is inflation anyway?
The Labor Department, which produces the inflation statistics for our economy (the Consumer Price Index or “CPI”), does make some modification for this—kind of. It’s called the “hedonic quality adjustment” and it bakes into the numbers the physical changes driven by technology (“Gee, all TVs now have a “picture-in-picture” feature, and that’s worth something, so the nominal inflation is a tad less.”) The problem with this is that its mechanical and material; it still doesn’t reflect benefits like peace of mind about the quality of car tires or your phone’s ability to track your children.
Jumping out from this micro-economic example, we can ask the same type of question about productivity and value at the societal (macro-economic) level. What consumers value change and the capabilities and effects of products and services change; yet economists value their continuous series of data that ignore attributes that cannot be reduced to a numerical/financial parameter. The media jump on easy to communicate numbers and we all “consume” this data to assess whether we are better or worse off. Economists pretend that their models capture a “real” picture of society. Policies get made, production and hiring and spending decisions get made, people vote—all based on these (what can only kindly be called) “fictions.”
“There are three kinds of lies: lies, damned lies, and statistics.” –attributed to Mark Twain, who attributed it to Disraeli.
“Any firm that hires an economist has one employee too many.” –attributed to Warren Buffet.
We may all perhaps be forgiven for being lost in this “Alice-in-Wonderland” portrayal of the state of the world. We’re all well indoctrinated into the culture of social science and its epistemology. We take comfort from the apparent certainty of numbers and the stack of Ph.D.s behind them. It seems like it’s off twelve ways from Sunday. How to make sense of it all? I wish I knew. Is that $22.95 organic/brioche burger really worth at that café ten times a McDouble burger from the Golden Arches “Dollar Menu” today? Is it worth 70 times the 28¢ it cost to get a McD’s burger in 1974? We don’t need the conspiracy theorists and tin-hat crazies to be at least aware of what we’re being fed.
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