Inflation has been pretty well contained lately, averaging
well below the Fed’s target rate of 2 percent. But could the true rate of
inflation be even lower than that? In a recent piece for The Wall Street Journal, Andy Kessler
explains why.
Kessler sees quality adjustment as the big flaw in the CPI
and other standard inflation. Government statisticians try to make quality
adjustments, but, as Kessler says, “by the time the BLS puts something new in
the CPI basket, it’s already cheap.” As a result, he thinks, the CPI overstates
the true rate of inflation by about 2 percentage points.
Is he right? Even the best econometricians aren’t sure.
That’s not because they aren’t good at what they do. Rather, it’s because
quality adjustment is fundamentally subjective.
With that in mind, I’ve developed my own purely subjective
approach to gauging inflation, based on a fantasy shopping trip to the past.
Off you go, into the time machine. All I ask is that you bring back an answer
to this question:
If you could choose between shopping today at today’s prices, or shopping in the past at past prices, what items, if any, would you buy from the past?
Although I can’t give you a seat in a real time machine, I
can give you the next best thing: An old Sears Catalog. A great website, www.wishbookweb.com,
keeps an archive of page-by-page images for these “Wishbooks” going all the way
back to 1937. I won’t take you back that far, just to 1962. I pick that year
because that was before the “Great Inflation” of the 1960s and 1970s, which
tripled the U.S. consumer price level over the next two decades. All prices
quoted from the 1962 catalog are the actual nominal prices of that year, with
no adjustments for inflation.
The clothing department
We’ll start in the clothing department. True, there have
been changes in style. Some of the 1962 specials would draw odd looks if you
wore them to the office or golf club in 2019. But not everything is out of
fashion. How about a women’s turtleneck sweater for $6.95, or a pair of
fleece-lined leather gloves for the same price? Classic style, quality
materials. Could you beat or match those prices today?
Yes, as it turns out. A search of Amazon.com, today’s analog
of the Sears Catalog, turns up the “oodji Ultra Women’s Basic Turtleneck” at
the bargain price of $6.70. And that’s with free shipping on Amazon Prime. With
the Sears Catalog, you had to pay the cost of parcel post yourself.
I found a pretty close match for the gloves, too: A pair
from Ayliss at $6.99. OK, those are lined with cashmere, not fleece, but how
picky can you be?
Here’s the amazing thing, though. Those are just the prices
in dollars. What if you restate them in terms of how many hours you would have
to work to buy those items in 1962 vs. 2019?
In 1962, average hourly earnings for production and
nonsupervisory employees in the United States were $2.50 per hour. Today they
are $23.24, more than nine times higher. That means you would have had to work
2 hours and 47 minutes to buy the sweater or the gloves. Today, you’d only have
to work 25 minutes to buy either item.
The watch department
Let’s get something for the guys. Need a watch? Here are the
men’s models on p. 164 of the Sears Catalog. A nice, basic Timex costs just
$14.95. Good deal, huh? But, oops, better read the fine print. You have to wind
it every day, and reset the time, too, or you’ll miss your bus.
Wait, though — there at the bottom of the page is the newest
thing, an electric watch for just $43.95. Not bad, but better check Amazon
before you buy. Sure enough, the 2019 “Men’s Easy Reader” from Timex (complete
with genuine leather strap) is just $29.95.
Before you buy that brand-name watch, though, you’d better
check the “Bargain Finds” department at Amazon. What? What’s this? A “Men’s
Fashion Quartz Analog Watch,” with free shipping, for $2.95? You gotta be
kidding, Amazon! Are you really selling a watch for less than what it costs you
to ship it? (The price may not last, but it’s a real offer as of today. To
prove it, I’m keeping screenshots of all the Amazon products and prices
mentioned in this post.)
Translating to hours worked: You would have had to work 17
hours and 35 minutes to buy the 1962 model Timex electric watch, but only 1
hour and 10 minutes for the 2019 Timex. To earn enough to buy the $2.95 bargain
version, you would only have had to work 8 minutes.
The TV department
Enough of the little stuff. Let’s look for a TV. Flipping
through the 1962 catalog, we find a top-of-the line 23-incher on p. 200 for
$189.95. And check this out: “Silicon rectifiers as used in military missiles
provide great reliability and long life.” Tempted? But, uh, “Controls
conveniently grouped on the front?” Does that mean no remote? And color? In
1962? No way.
Checking Amazon, we find a nice 24 inch TV from LG for
$84.99. Remote? Check. Color? Check. Not to mention a flat screen and high
definition.
In 1962, you would have had to work 76 hours, almost two
weeks, to buy that 23 inch black-and-white TV. Today, the LG flat screen model
would cost you just 3 hours and 39 minutes — one twentieth as much.
Other stuff
Of course, you couldn’t buy everything from the Sears
Catalog in 1962, any more than you can buy everything from Amazon today.
Importantly, neither Sears nor Amazon sells services, and prices of services
have gone up a lot faster than prices of goods.
For example, suppose you are about to have a baby, and you
are shopping for a hospital. According to Parents.com, your average hospital bill will be about
$3,500. I couldn’t find a comparable cost for 1962, but I did find an
interesting item at babycenter.com that gives details, including a photo image,
of the hospital bill for a woman who gave birth in 1954:
Room 1–1 night — $6.50 per day = $6.50 Room 5–4 nights — $9.00 per day = $36.00 Anesthetic — $10.00 Dressings — $2.50 Drugs — $8.50 Delivery Service (Maternity) — $15.00 Laboratory Tests — $8.00 Nursery Care — $10.00 Treatments — $.35 X-Rays & Fluoroscopics — $2.00 Tax — $.99 Total Account — $99.84 Deposit — $50.00 Balance Due Payable — $49.84
You would have to work 150 hours today— nearly a month — to
pay the $3,500 bill compared to just 40 hours then to pay the $99.84 bill.
That’s a big difference. No wonder the birthrate is down.
On the other hand, there are quality differences here, too.
The rate of infant mortality was 26 per 1,000 births in 1954, compared with 5.8
today. Maternal mortality rates were also about four times higher in the 1950s
than they are now.
Suppose your choices today were between East Side Hospital,
which would charge you a month’s pay, or the West Side Hospital, which would
charge you just a week’s pay. Would you really choose West Side if you knew
that the chance was four times higher that Mom or the new baby would die there?
As I noted at the outset, quality is subjective. You might
find some cool retro stuff in the 1962 Sears catalog. You might be willing to
take your chances with 1950s medical care if it would save you a bundle, or if
the only alternative was not being able to afford any medical care at all.
On the whole, though, I think the examples given here
support Andy Kessler’s belief that the CPI overstates inflation, rather than
understating it, when you take quality into account.
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