by Gary Alexander

December 6, 2022

This column may end up continuing my “Thanksgiving” streak into Part VI: Inflation is decelerating fast!

All through 2021, the Federal Reserve Board of Governors, led by Chairman Jerome Powell, along with Treasury Secretary Janet Yellen and President Biden’s Amen Chorus, sang from the same hymnal page, that inflation was “transitory” and it was actually good for the economy. That didn’t resonate well with millions of struggling families facing double-digit increases in necessary food, fuel, and housing costs.

These PhD pundits were wrong, of course, unless you define “transitory” as two years, because inflation will probably settle down early next year, because the Fed is doing what they should have done a lot sooner – vacuuming up much of the vast infusion of money supply to “fight COVID” or “stimulate” an economy that was already at warp speed (+5.6%) in 2021. Only in March 2022 did they start raising rates and then sop up $95 billion per month in “quantitative tightening” to reduce the Fed’s balance sheet.

Federal Reserve Total Monetary Base Chart

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

Let us pause to define inflation. For far too long, “inflation” has meant “rising prices” to most Americans, but the term originally meant “rising money supply,” as in the inflating of a balloon with a rising amount of air – like “inflating a tire.” This is still the classic “Austrian” economic definition of inflation. The leading 20th Century Austrian economist, Ludwig von Mises, said in a lecture in West Virginia in 1951:

Inflation, as this term was always used everywhere and especially in this country, means increasing the quantity of money and bank notes in circulation and the quantity of bank deposits subject to check. But people today use the term ‘inflation’ to refer to the phenomenon that is an inevitable consequence of inflation, that is the tendency of all prices and wage rates to rise. The result of this deplorable confusion is that there is no term left to signify the cause of this rise in prices and wages.”

– Ludwig von Mises (1951).

About a decade later, two noted American economists reworded Mises’ classic definition of inflation:

“The word ‘inflation’ originally applied solely to the quantity of money. It meant that the volume of money was inflated, blown up, overextended. It is not mere pedantry to insist that the word should be used only in its original meaning. To use it to mean ‘a rise in prices’ is to deflect attention away from the real cause of inflation and the real cure for it.”

– Henry Hazlitt, in “What You Should Know About Inflation” (1960)

“Inflation is always and everywhere a monetary phenomenon, in the sense that it is and can be produced only by a more rapid increase in the quantity of money than in output.”

– Milton Friedman (1963)

The cause-and-effect of printing and spending money is not immediate. The effect of money in the system to cause price increases generally takes 6-9 months. The same is true for deflationary policies, so the beginning of the Fed’s decline in money supply in April 2022 should be felt around the start of 2023.

Fed Balance Sheet Total Assets Chart

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

So far, it looks like the Consumer Price Index for goods peaked at 14.2% (year over year) in March and is most recently at 8.6% in October. Price increases for durable goods peaked at 18.7% (y/y) in February and fell to 4.8% in October. With these peaks in mind, year-over-year figures could turn negative soon.

Consumer Goods Charts

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

Declines in prices of services will be stickier and more stubborn, but the Zillow Rent Index peaked at 17.1% y/y last February before falling to 9.6% in October, so rent growth rates might also slow next year. Wages and Social Security benefits are already slated to rise in 2023, but that is already baked in the cake.

Why Many Huge Long-Term Price Increases Are Illusory – or Even Deflationary

Consumer price complainers seldom cite prices that decline dramatically, but let me rehearse a few.

I recall flying coast-to-coast in 1975 for about $900 a ticket. It’s half that now. A long-distance phone call could cost $2 a minute in prime time. Now, it’s essentially free. I paid $475 for a new Encyclopedia Brittanica set in 1972. A far more complete Wikipedia online is essentially free. I paid $3,000 plus $500 for a printer for an in 1984 and it blew up every time I wrote eight pages or more. Now, I can buy a $399 laptop that stores gigabytes (with all these charts, too). An early calculator cost $500. The first cellphones felt like a brick (2 pounds), lasted 30 minutes without re-charging, and cost $3,995.

Need I go on?

But let me cite some items that have risen in price. You hear complaints about them all the time, but I’ll give you the rest of the story, courtesy of a new book, “Superabundance” by Marian L. Tupy and Gale L. Pooley. They measure the amount of time it takes a median-salaried worker to buy a certain product.

Before I cite these examples, let me quote three all-important words at the end of Milton Friedman’s definition of inflation as a “monetary phenomenon” (above). He refers to inflation as “a more rapid increase in the quantity of money than in output.” Our wealth and output have grown so much in the last 50 years that you can’t measure prices in a vacuum. You must measure our ability to pay those prices.

Here are some widely complained-about price increases of the last year (or the last 25 to 50 years):

Time Cost of a Thanksgiving Dinner Chart

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

#1: The Cost of a Thanksgiving Dinner. Unless you were on a remote desert island with no Internet service, you heard stories in the last month about the rapid rise in the cost of a traditional Thanksgiving dinner – this year, and over time. Since 1986, the American Farm Bureau Federation has conducted an annual price survey of food items in a typical Thanksgiving dinner designed for 10 people with plenty of leftovers, including a 16-pound turkey, a 30-ounce pumpkin pie mix, and lots of other goodies. In nominal terms, the cost of that dinner rose from $28.74 in 1986 to $46.90 in 2020, up 63.2%. In the same 34 years, inflation rose 135%, so the dinner rose less than half as fast as inflation, but the average unskilled worker put in 3.27 hours of labor for that dinner in 1986, and only 1.67 hours in 2020, or 40.3% less time. Blue-collar workers put in 38% less time for the turkey repast, and skilled workers put in 74.8% fewer hours! *

#2: Housing costs are incredibly higher, aren’t they? Superabundance authors say: “Bill Bonner noted that ‘it cost $23,000 in 1970 to put a roof over [one’s] head. Today it’s $240,000.’ What he forgot to mention is that the average house in 1970 was 1,500 square feet. Today it’s closer to 2,700 square feet…. The nominal price of a square foot of house in 1970 was $15.33 and the U.S. blue-collar hourly compensation rate was $3.93, indicating a time price (TP) of 3.9 hours per square foot. In 2019, the nominal price of a square foot of housing was $88.89, and the U.S. blue-collar hourly compensation rate was $32.36, indicating a TP of 2.75 hours per square foot. Those figures indicate that the price of housing declined by almost 30% between 1970 and 2019.” For skilled workers, the time price decline was 67%. *

#3: Television and other electronic prices. Here’s where the math gets crazy. I paid $500** for my first color TV console set in 1982, and it was a pretty rotten picture by today’s standards. For much less than $500, I can get a fairly large HDTV flat screen now. In 1997, Sharp and Sony introduced their first 42-inch flat-screen TVs for about $15,000 each. That year the U.S. blue-collar hourly pay rate was $18.12 per hour, which works out to 828 hours to afford this early flat screen. In 2019, a large discount retail store advertised a 43-inch LCD set for $149, with the blue-collar hourly rate averaging $32.36, so it took just 4.6 hours of work to buy that set. It’s 99.45% cheaper, a compounded savings of 26.7% per year. *

Using Moore’s law, the transaction costs and storage rates in our computers are falling at similar rates.

So, tell me once again how fast prices are rising.

*These three examples are from pages 372, 431, and 465, respectively, of “Superabundance” by Tupy and Pooley
** I won the TV in a bank promotional contest, but the bank and the IRS told me the taxable retail value was $500.

All content above represents the opinion of Gary Alexander of Navellier & Associates, Inc.

Please see important disclosures below.

About The Author

Gary Alexander

Gary Alexander has been Senior Writer at Navellier since 2009.  He edits Navellier’s weekly Marketmail and writes a weekly Growth Mail column, in which he uses market history to support the case for growth stocks.  For the previous 20 years before joining Navellier, he was Senior Executive Editor at InvestorPlace Media (formerly Phillips Publishing), where he worked with several leading investment analysts, including Louis Navellier (since 1997), helping launch Louis Navellier’s Blue Chip Growth and Global Growth newsletters.

Prior to that, Gary edited Wealth Magazine and Gold Newsletter and wrote various investment research reports for Jefferson Financial in New Orleans in the 1980s.  He began his financial newsletter career with KCI Communications in 1980, where he served as consulting editor for Personal Finance newsletter while serving as general manager of KCI’s Alexandria House book division.  Before that, he covered the economics beat for news magazines. All content of “Growth Mail” represents the opinion of Gary Alexander

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