Thursday, November 4, 2010

Calculating inflation

For decades, the US government has published their calculations of annual increases in inflation. These calculations have been very controversial since many economists claim that changes in the calculation over the years understate the real inflation that has been taking place. Though the government strongly defends their inflation statistics, the figure is meaningless without direct comparison of the cost of the same product from one time period to another.

The price of beef is one example of how the government has kept inflation numbers low.  In past inflation calculations beef steak prices were compared, but one year steak was suddenly replaced with  ground beef driving the inflation number for beef much lower. The price of steak in 1972 and the price of ground beef in 1984  hardly seems comparable and yet government economists insist their calculation is valid . Substituting lower quality  products in the inflation calculation has also resulted in an understatement of the true rate of inflation over the past three decades.

Though some of the substitutions are obvious like steak and ground beef, many are more subtle though every bit as substantial. Kitchen appliances for instance, are not comparable. A coffee maker with a timer and a carafe manufactured in America in 1990 cost about $110.  In 2002 you could buy two for that price making it appear that the cost had dropped by 50%. However, the difference in the quality of the 1990 product, tested by UL for safety and able to last 10 years is not comparable to the cheaper coffee pot manufactured by underpaid workers in Asia with minimal testing.  The price of children’s toys painted with lead and food products laced with melamine are being compared to the price of higher quality products we use to make in the US as though these products are equivalent.  

The US government’s official figure for inflation, or Consumer Price Index (CPI), is 260% between 1980 and 2010.  In other words, $1,000 in 1980 had the same buying power as $2,600 in 2010. But the reality is that $2,600 today has nowhere near the buying power of $1,000 in 1980.  One only has to look at the components of the American dream to gain a picture of the how out of reach the dream has now become.

House: In 1980 the average house cost $68,000. Using the US government consumer price index, an average U.S. house today should cost $176,800. Yet even after the crashing of housing prices over the past 3 years, the average house price is still $235,000.   So, the inflation in housing prices is actually 345%, not the CPI figure of 260%  which means the government is understating inflation by 85%.

Car: In 1980, the average price of new car was $7210, but in 2010, the average new car is $28,400.   According to the US inflation index, a car price on average should be $18,746, yet the actual price is 393% higher. The government is understating the inflation in new car prices by 133%.

College for our Kids: In 1980,  the average cost to attend a public college was $2373 a year for tuition, fees, room, and board and the average cost of a private college was $5470.  Now the cost for a public college has swollen to $20,000 a year and private colleges to $39,000 a year.  This is a cost increase of 843% for public colleges and 713% for private colleges. Government numbers are understating the inflation in college costs by 583% for public college and 453% for private colleges.

Health Care: In 1980, the average person spent $1072 a year on health care expenditures, but in 2008 the average person spent $7681 a year, an increase of 716%. The inflation of health care is being understated by over 456%.

Though inflation is being understated by 85-500% for the basics of American life, those that have been able to retain their jobs have not seen matching increases in wages.  In 1980, the average worker’s wage was $12,513.  In 2009, the average wage was $39,054 and using the US government inflation rate of 260%, the average wage today should be $32,500.  The small increase of $6,554 over the inflation index, or 20%, does not compensate for the dramatic increase over the published inflation numbers of everything else.

Seeing the inflated prices of houses, cars, college, health care, and the decreasing quality in products and foods helps us to understand why we , like so many other Americans, are struggling to gain the American dream of health, wealth and happiness.


Christine H. said...

Very interesting post. Health care and education really have become outrageous. I don't have any children, but I am aware of and shocked by the college costs my brother pays for his daughters.

Anonymous said...

as someone who's salary has increased by 1,038% since 1980 (been lucky there and work many 60 hour weeks along the way) i have always wondered how people get by and as your numbers show they actually are not getting by but are falling behind due to purchasing inferior products that only last a few years :( ... this low price at all costs mentality has got to stop,it is a large part of the current economic condition. from wal-mart to airlines we are a nation wanting everything for less yet expecting better quality and better service plus higher wages, it's as upside down as trying to fix the deficit by cutting taxes.