Tuesday, April 26, 2022

What's Up With Rising Inflation?

What's Up With Rising Inflation?
Nicholas Johnson
The Gazette, April 26, 2022, p. A5

Inflation can be a cruel, cold wind. It bites hardest those at the bottom of the economic ladder, or on fixed income -- especially when political leaders cut benefits. The wealthiest never knew what they were paying for groceries, still don’t know nor care.

All the rest of us need to know about inflation is whether we suddenly have too much month at the end of the money – and, if so, what can we do about it?

We don’t need to understand, let alone try to calculate, the Bureau of Labor Statistics (BLS) Consumer Price Index formula: CPIt = Ct/Co * 100. That may produce a number, the percentage increase in the CPI, but we don’t buy the CPI, as if investing in an index fund. We buy from among millions of individual items.

For example, “bread” is one of the CPI products. But there are over 100 types of bread, in various sizes, from different bakeries, stores, cities, days, with very different prices.

That’s why there’s no single “inflation.” There is only your memory of what you paid your grocery store for your family’s favorite bread last summer and what you paid yesterday.

Memory is at the core of the impact of increasing prices on our mood. Some remember last year’s prices. Others can recall prices during their youth. Depending on one’s age that can make an enormous difference.

I can remember, and the BLS reports, when things cost a nickel. An ice cream cone with two generous scoops. An adult’s cup of coffee. A loaf of Wonder bread. Many grocery items were a dime, as were my movie tickets.

My young buddies and I had pennies and occasionally sacrificed one to be flattened on the railroad track. We speculated whether a 50-cent piece might derail a steam engine. But none of us had ever possessed a half-dollar or would have willingly sacrificed one to science.

My first car, a roofless Model A, cost $25. Tuition at the University of Texas was $25. My four-door Texas Model A, with a roof, cost $75. The neighborhood Texaco station charged 19 cents a gallon. [Photo credit:wikimedia commons, public domain, John Margolies.]

During my 1974 congressional primary race my house rent was $40 a month.

Of course, wages increased, too; but without unions they haven’t kept up. It’s virtually impossible to calculate with any precision how much ahead or behind we are from 10, 20 or 50 years ago. My rule of thumb is that most things are now priced at least 20 to 30 times the prices I remember.

Nor is there much we could do even if we knew. Find a job that pays more? Good luck.

Our most expensive purchases are for “time-shifting.” Americans pay $120 billion a year in credit card interest to have things now rather than pay cash later. Sometimes that’s necessary, but not always. (Google “marshmallow experiment” or Steve Martin’s “Don’t Buy Stuff.”)

Hey, how about we pay more attention to who’s financing the politicians we vote for?
Nicholas Johnson still picks up pennies from sidewalks in Iowa City. mailbox@nicholasjohnson.org

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Current inflation. “U.S. Inflation Highest Since 1981 as CPI Hits 8.5% in March,” Inflation Calculator, April 12, 2022, https://www.usinflationcalculator.com/

BLS CPI. “Consumer Price Index,” Bureau of Labor Statistics, https://www.bls.gov/cpi (a source that slices CPI by more ways than even imaginable)

CPI Calculation. “Consumer Price Index (CPI) Calculator, Calculator Academy, Aug. 3, 2021, https://calculator.academy/consumer-price-index-cpi-calculator/ (for formula displayed in column)

“Consumer Price Index: Calculation,” Bureau of Labor Statistics, Nov. 24, 2020, https://www.bls.gov/opub/hom/cpi/calculation.htm

“How to Calculate the CPI and Inflation Rate,” https://www.uvm.edu/~awoolf/classes/spring2005/ec11/calculating_inflation.html#:~:text=To%20find%20the%20CPI%20in,year%2C%20in%20this%20case%201984

Bread. “Bread is among the food items which are widely consumed worldwide. As per the reports suggested by different restaurants, food surveys, and data, more than 100 types of bread are present today, with different types popular among different societies.” “Different Types Of Bread From Around The World You Should Know!” kidadl, Jan. 20, 2022, https://kidadl.com/fun-facts/different-types-of-bread-from-around-the-world-you-should-know

List of recalled prices. These are from memories from late 1930s and WWII believed to be accurate, and consistent with BLS amounts, but not documented.

The BLS reports, for example, from a later time period, “Prices of selected food items, 1947”:
Apples, 12.8 cents/pound
Potatoes, 5.0 cents/pound
Bananas, 15 cents/pound
Flour, 4.8 cents/pound
Rice 18.4 cents/pound
White bread 12.5 cents/pound
Round steak 75.6 cents/pound
Milk, 18.7 cents/quart
Butter, 80.5 cents/pound”
“One hundred years of price change: the Consumer Price Index and the American inflation experience,” Bureau of Labor Statistics, April 2014, https://www.bls.gov/opub/mlr/2014/article/one-hundred-years-of-price-change-the-consumer-price-index-and-the-american-inflation-experience.htm

Inflation decreases wages. Judge Glock, “Inflation Drives Wages Down, Not Up; The ‘wage-price spiral’ is a myth. It’s much easier to raise prices than wages,” Wall Street Journal,” Jan. 31, 2022, https://www.wsj.com/articles/inflation-drives-worker-pay-down-not-up-wage-price-spiral-raises-goods-keynes-friedman-cost-push-fed-11643662537

(“The Labor Department released a report Friday showing that worker pay increased about 4% in one year, the fastest rate in two decades. This led to predictable alarm that the U.S. is facing a “wage-price spiral,” in which higher wages push up prices, which lead to demands for still-higher wages, and so forth. But the wage-price spiral is a false and antiquated economic idea that refuses to die and keeps generating bad policies.

“Wages don’t spiral up during inflation; they spiral down as higher prices eat away paychecks. The dollar amounts on paychecks will rise, but not fast enough for their real value to outpace inflation. The recent stories of wage increases came not long after the government announced prices increased 7% in the past year. A more accurate headline for coverage of Labor’s report last Friday would have been “Real Wages Drop 3%.”

“The reason real wages are dropping is simple. Wages are what economists call “sticky,” meaning they don’t change as fast as other prices do. When inflation comes along, gasoline stations can switch their price signs in an hour and restaurants can adjust their menus in a day, but most employees get a salary bump only once a year. Some unions renegotiate their salaries only every five years.

“The combination of flexible prices and sticky wages also explains why inflation provides a temporary boost for business. John Maynard Keynes observed that inflation tends to increase profits because it creates a greater spread between the prices businesses charged and the wages they paid. As one International Monetary Fund report stated, during an inflation there is a “redistribution of income away from labor” to capital. This explains recent surging business profits.

“We also saw this story play out in the 1970s, when the idea of the wage-price spiral first attracted attention. At the time, many Keynesian economists wanted to blame inflation on anything but the Federal Reserve printing too much money. So they came up with the wage-price spiral, also known as cost-push inflation, which they thought was driving up prices. But they confused nominal and real wages. Even though paychecks were for more dollars, their actual value dropped by almost 20% over the decade, as real profits increased.” . . . )

Decline in unions decreased wages. Alana Semuels, “Fewer Unions, Lower Pay for Everybody; If organized labor were as strong today as it was in the late 1970s, nonunion men without a high-school diploma would be earning 9 percent more, according to a new study,” The Atlantic, Aug. 30, 2016, https://www.theatlantic.com/business/archive/2016/08/union-inequality-wages/497954/

$120 B credit card interest. Ashwin Vasan and Wei Zhang, “Americans Pay $120 Billion in Credit Card Interest and Fees Each Year,” Consumer Financial Protection Bureau, Jan. 19, 2022, https://www.consumerfinance.gov/about-us/blog/americans-pay-120-billion-in-credit-card-interest-and-fees-each-year/

Marshmallow study. “Stanford Marshmallow Experiment,” https://en.wikipedia.org/wiki/Stanford_marshmallow_experiment

Don’t buy stuff. “SNL Transcripts: Steve Martin: 02/04/06: Don’t Buy Stuff You Cannot Afford,” SNL Transcripts Tonight, Season 31, Episode 12, https://snltranscripts.jt.org/05/05lbuy.phtml

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