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……$10
- US Postage Stamp……$.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:
- Subtract the difference: $169,000 – 25,200 = $143,800
- 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)
- 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; 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’s 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?