The debate over inflation—which ranges all the way from those who see the imminent risk of deflation to those who see hyperinflation just around the corner—continues, and with good reason. Inflation is alive and well in the services and nondurable sectors of the economy, while deflation is the "new normal" in the durable sector of the economy. Some prices are going up, but others are going down; on average, the government is telling us that inflation is only about 2%. That's a calm surface on a body of water that is roiling underneath.
The first of these two charts shows the average price level for each major sector. Service sector prices have risen about 60% over the past 18 years, while the price of nondurables are up a little over 50%. But durable goods prices have fallen steadily, and are now down a total of 28%. In the entire history of these series, there has never been a sustained period of declining prices except for the past 18 years in the durables sector. Not coincidentally, that period corresponds to the emergence of China as a powerhouse producer of durable goods (e.g., computers and TVs). Memo to Romney and Obama: China has done us a great service by producing products so cheaply.
If we make the assumption that the price of services is a proxy for wages and salaries, then what we see here is arguably the most incredible increase in workers' purchasing power in the history of the world. Do the math: over the past 18 years, services are up 161% and durables are down 28%. 161/.72 = 223.9. Salaries have more than doubled relative to durable goods. Put another way, an hours' worth of work now buys more than twice as much in the way of durable goods as it did 18 years ago—it takes 55% less work today to buy the typical durable good than it did 18 years ago. Bottom line, labor has become a whole lot more valuable and more expensive than things, especially very sophisticated and powerful things like computers.
Which leaves me puzzled as to the brouhaha over whether the iPad mini—the newest durable good to be offered to the public—is a whole lot more expensive, at a price of $329, than the Amazon Kindle Fire HD at $199. As the link demonstrates, there are some significant differences in features between the two devices. My point is whether the price of those differences—$130—is a huge amount. Is a 35% larger screen + a 5 mp camera + greater video compatibility + hundreds of thousands of extra apps + aluminum construction (vs. plastic) worth an extra $130? Consider what $130 gets you these days: a dinner for two with a bottle of wine at an upscale restaurant; a pair of jeans at Nordstrom; two tanks of gasoline; admission for one to Disneyland; a bottle of Dom Perignon; a small basket of groceries.
The average person now has available to him or her gadgets that 18 years ago would have been considered magical, if not impossible. With only one week's worth of minimum wages in California ($8/hr), you can buy yourself an iPad mini: a device that connects you to all information in the world; that holds and displays and edits and takes thousands of videos and photos; that holds your entire music library; that lets you read millions of books; that holds and displays maps of the entire world; that lets you explore the cosmos by simply pointing at the stars at night; that lets you read hundreds of newspapers; that lets you plan and reserve flights and hotels all over the world for free; that let's you play and record all kinds of music; that gives you access to thousands of video games that never before existed; that let's you correspond with people instantly all over the world; that's lets you fly dozens of planes realistically. I could go on, but I hope my point is clear. 18 years ago a device like the iPad mini would have been inconceivable no matter how much it cost. Today, in contrast, we are quibbling about whether such a device should cost $200, $250 or $330, when the difference is almost insignificant for the vast majority of people.
It is undeniably deflationary when a week's worth of work at minimum wage buys you things that only 18 years ago would have been unavailable to even the richest person on the planet. But at the same time, it costs an employer 2.2 times as much to hire that minimum wage worker, and it costs us all 5 times more to fill our tanks with gasoline. That's a lot of inflation. Or is it?
No wonder the debate rages.
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