Mr. LH recently celebrated his big 4-0 and though he still gets carded (lucky for him!), it was definitely a monumental birthday. One of the cards he received was from his step-dad; he sent one of those “Remember When..” booklets. We chuckled at the bell-bottom pants and Age of Aquarius images, yet it set me off on an inflation tirade. Here’s a sample cost of living from 1971:

Let’s compare that to today’s cost of living, Circa 2011 (funny that my students are working on a similar project and calculating increased percentages, but more on that below…):

• New House……\$169,000
• Average Income……\$40,000 (this one was hard to track down; it varies by city)
• New Car……\$28,000
• Average Rent…..\$928
• Movie Ticket……\$10
• Gasoline………\$3.79
• US Postage Stamp……\$.44

I didn’t list the cost of groceries, but skimming the list, milk is the only item that has double in price compared to things like coffee have which have gone up almost 6-10 times depending on brand. Now all of this happens to coincide with a similar class project; my students are calculating percent increases on groceries, believe it or not. What we’ve found is that groceries have increased anywhere from 150% to 1,100% over 40 years (soda is at the low end and pasta sauce is at the high end – go figure). There’s a huge variation depending on item, obviously.

Just for fun (because math is fun you know!), let’s calculate the percent increase between the cost of a house from 1971 and the cost of a house today. Here’s how to do it:

1. Subtract the difference: \$169,000 – 25,200 = \$143,800
2. Now divide the difference of \$143,800 by the 1971 price of \$25,200: 143,800/25,200 = 5.71 (keep it simple at 2 decimal places by rounding)
3. Multiply the result by 100 and this is the percent increase: 5.71 x 100 = 571%

So the average cost of a house has increased by 571% over the past 40 years. Now what about salary? If I use the same formula and the figures I’ve listed here, the increase in the average salary is a paltry 277%. Say Wha……?! As you can see, there’s a huge discrepancy between what things cost today and today’s average salary. Maybe this has something to do with poor home sales in June (compounded with tighter lending practices!) I’m not an economist but the math speaks for itself; salaries have not kept pace with the cost of living. Even if I increased today’s average salary to \$51,000 (in my opinion this figure seems high), salaries have only increased by 380%.

How did this happen? In the Mid-1970’s through the early 1980’s, inflation spiked;Β  the cost of oil and labor increased causing the price of good and services to rise. Too much money circulating in the economy and loose credit practices also contributed to this inflation. Over time, inflation leveled out; the costs of goods decreased as people’sΒ  incomes increased (though the math shows that it didn’t revert back to levels 40 years ago.)

Will inflation happen again? Just like all economic cycles, most likely yes. But who knows when. There are a few factors that could influence this cyclical event, such as our government printing more money with fewer goods being available. Or the cost of goods increasing yet salaries stagnating.

Hey, wait a minute? Isn’t this already happening? Could inflation be bearing its ugly head just around the corner? My 8-ball says, “Signs point to yes.”

A few good posts that detail the causes of inflation much better than I can are:

• Seeking Alpha
• A Berkeley Econ Paper
• Money Watch

What do you think? Is inflation a given?

1. Money Beagle

I always love seeing those comparisons especially when looking at what the price of gas is compared to what it used to be. That’s the one that I think makes people *gulp* the most, from what I’ve seen!

2. I love how you broke it down into percentages! I would think the cost of manufactured goods in relation to income would be lower than it was back then due to outsourcing. I wonder if that offsets the house-income ratio.

3. This is so interesting! I find price comparisons like this extremely interesting and eye opening, especially with the way you’ve used the percentages. The most dramatic for me was the way housing has not kept up with salaries. I think on some level, I was aware of it but to see it like this just makes my jaw drop.

4. Wow, incredible! I guess it shows that owning real assets is a must to hedge against inflation!

5. @SillySimple
That Harvard tuition difference is freaky! It makes you wonder if the price increase is justified. What made it so much “cheaper” back in ’71 than today? The prestige? I think this says something about us as a society. π

6. @MoneyCone
I’m a percent-type person. Percents make much more sense to me than just comparing figures. Must have something to do with grading papers, perhaps. π

7. @Sam
You’re so right. I guess owning things like homes work out to the owners advantage over time, especially when looking at percent increases. However, I think house prices are still a bit bloated due to the easy lending terms from 2001-2006. These prices need to come down a bit more to level out the playing field in my opinion.

8. @jana
I love seeing the figures myself (hence the calculations!) I’ve known for a while that the ‘good ‘ol days’ or “American Dream” were a bit of a distant memory for Gen X and Y. I’m thinking we need to redefine this dream a bit and makes some changes! Perhaps smaller, more mobile homes with less debt. Smaller, more fuel efficient cars (or bikes!). More city living, less suburban commuting. That would be a start.

9. @Money Beagle
The difference in gas prices is crazy. I remember when gas was .99 cents! I’m pretty sure we’ll never see prices that low, or even comparatively low, again. Must ride my bike some more!

10. krantcents

We are experiencing inflation and the government statistics deny it because they leave out food and the cost of gasoline. With the price of oil around \$100 per barrel, it affects gasoline prices as well as transportation, utilities and almost everything. Welcome to inflation!

BTW, I moved to southern California in 1971! I rented an apartment in a very fashionable are for \$200 per month.

• @krantcents – Thanks for sharing your rent in ’71, that helps put things in perspective. I also didn’t happen to calculate the rise in gas, but you’re right.

11. Barb Friedberg

I am always fascinated by the inflation calculations. They are so confronting, especially the difference between housing and job numbers!!!!!

• @Barb – Yes, something is definitely not right if you compare jobs and housing.

12. I’m afraid of future inflation! Especially with the dollar that is dropping like a stone throw into a pond…

Nice comparison, and Happy B-day to your husband… Must be nice to be 40 and still get carded!

• @Money Reason – I know, it’s so unfair. I stopped getting carded a few years ago and I’m a little younger than him (but not much. π )

13. mbhunter

Oh wow … I’m not that much behind Mr. LH. π Happens to everyone at some point.

When the banks start lending all of that bailout money they got a few years go, ooohhhhhh boy … that will be some inflation there.

• @MB Hunter – I’m sure we’ll be seeing more inflation over the next few years. All I can say is pay off as much debt as possible so that more money is available for everyday living!

14. Amanda L Grossman

Great analysis! I miss seeing those cent signs in store advertisements. Perhaps my youth WAS the good old days:).

• @Amanda – I remember when gas was under \$1.00 -I must be old. π

15. Squirrelers

Cool comparison. I must be ancient, as that was my birth year too, good ole 1971. Yes, I hit 40 this past year. It’s all good though, I aim to have fun like a kid while being responsible like someone my age:)

Anyway, it’s really something how things have changed over the years. As I get older, I now recongnize how a long-term perspective on things can help us better understand what’s happening today.

Also – I tend to agree with you on inflation:)

• @Squirrelers – I definitely have a different perspective on things as well. I’m not too far off the 40-year mark (’72 was my year). I’ll have to do another comparison next year. π

16. Our purchasing power has really shrunk, hasn’t it. What the country needs is a good five-cent cigar!

(it’s now at least two bucks)

• @101 Centavos – At least \$2.00. And I’ll agree; our purchasing power really has shrunk.

17. I like the percentages as well as it really shows the dramatic effect of inflation on our purchasing power. Gasoline for 40 cents a gallon, that must be nice as now the gas is hovering around \$4.00.

18. Plus in 1971 just about every job offered a pension. Now we have less discretionary income and have to self-fund our retirements.

It really was the good old days!

• @Kay Lynn – You’re right. Pensions have pretty much disappeared and we do have less money to save for our futures with. Yuck. All I can say is we have to redefine our futures. Check out my Tumbleweed post – going tiny might be the way to go!

19. What struck me the most about this was that 1 year at an Ivy League school only cost 1/5 of the average yearly salary. Now it costs roughly as much as the average yearly salary.

20. youngandthrifty

I wish houses were still that cheap! Though I don’t wish to be making only \$10K annually π

• @Young and Thrifty – \$10K doesn’t seem like very much, I agree. But 40 years ago that \$10K went pretty far!

21. Paula @ AffordAnything.org

All the more reason to invest your money! It’s hard enough just to keep pace with inflation, much less beat it, so keeping your money in cash or in CD’s is going to cause you to lose over time. Even if you’re risk-averse, at least be in TIPS!

• @Paula – Investing definitely helps keep up with inflation. Just think of those who invested in real estate, they made a fortune over those 40 years!

22. Khaleef @ KNS Financial

I blame the difference between wage growth and housing prices on easy credit. Once it became common to “buy” a house by using tons of credit, it was impossible to maintain the pre-credit ratio.

Many people would borrow a couple of years worth of salary (at the most) in order to buy a house, now they go between 5 and 10 times their annual salary!

I think that looking at old prices can be a real eye opener!

• @Khaleef -You’re right. It is and was easy credit that has made housing prices out-pace salary growth. Now that creditors are tightening up loan qualifications again, perhaps housing prices will at least fall with a 3-4 times a typical salary. I think we really need to look at the past and realize that the future will be different. I’m actually more curious about what percent salaries were compared to houses in the ’20’s. That was before mass-mortgages. I’ll have to investigate.

23. I found it especially ironic that 1971 was the year that Nixon closed the gold window leading to the inflationary morass that we are experiencing today. I even felt compelled to respond with a post of my own since inflation is one of my favorite topics. Sam makes a great point about real assets and nothing could be truer.

• @CashFlowMantra – Thanks for using my post as inspiration. I read your article and it makes much more sense in terms of why investments do better over time. When I wrote my post, I didn’t realize that was the year the dollar was really no longer backed by gold. Thanks again for sharing your information!

24. Dividend Growth Investor

One of the first cell phones in the 1980’s ( the one that Gordon Gekko had in the movie Wall Street) cost about \$4,000. Now, even the coolest phones with all types of apps ( and games like Angry Birds) cost only a few hundred buck’s at most. My friend also likes to spend on computers as well.

Apple computers ,cost \$2500 for an Apple II in 1980s :oldcomputers.net/macin… I would say a desktop computer costs less today.

If I were an active investor, I would have spent \$40 in brokerage commissions in order to purchase 25 shares at \$40/share or \$1000 worth of stock in 1980’s. Now, I could do all of that for \$3 in total.

So I would say, we are actually experiencing deflation. What inflation are we talking about?

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