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Anarchy in the UK

The real rate of inflation

As some might surmise, the past decade represents an historic period, economically, politically, technologically, climatologically and sociologically. One feature of this decade, largely ignored by leading economists, is the rate of inflation of the costs of living. In particular, the increase in prices of tuition, healthcare, oil, gasoline, electricity, housing and food are quite stunning, especially in comparison to the rather anemic growth in wages over this time period (2 percent annually).

Let us run through some of the numbers before jumping to abstract conclusions:

1. Electricity went from approximately 8 cents per kilowatt-hour to 11.4 cents per kilowatt-hour.

2. Gasoline went from $1.90 per gallon to $3.73 per gallon, as per an August 2011 average spot price.

3. Housing, even given the recent mortgage crisis (circa 2008), increased in price by 17 percent, from a $145,000 average price to $170,000 average price per domicile.

4. Oil, a base-commodity component of pharmaceuticals, herbicides, pesticides, plastics, and most liquid fuels utilized in the United States, increased in price by 288 percent: From 1950–2000, the inflation-adjusted price of oil was ~$25.00 per barrel; shockingly, in 2011, the yearly average was about $90 per barrel. For more, in-depth analysis, see David Murphy et al. 2011.

5. Food, another base commodity, increased by 226 percent over this same time period: The Food Price Index, a strong correlative for the price of actual food items, increased from 90 to 234, as of early 2011 FAO reports.

6. Tuition, rather startlingly given the recession, continued its growth by 73 percent in this time frame.

7. And, lastly, healthcare increased by a mere 440 percent from 2000–2011: a per capita cost of $1,300 exploded to over $7,000 per person per year in 2007.

There are many potential explanations for these events, but one should start by noting the conspicuous discrepancies: Firstly, the average inflation rate over this time period for these basic commodities was 15.77 percent (standard errors are +/- 5 percent); this is significantly higher than the 3.5 percent US Federal Reserve estimate of average inflation for this time period. However, and worthy of note, the US Federal Reserve calculates inflation based on TIPS (Treasury Inflation-Protected Securities) and the Personal Consumption Expenditures price index (PCE), both of which poorly reflect the actual cost of living increases as a function of time. The actual inflation rate for the bulk of the economy, including discretionary goods and services, does correlate well with the Federal Reserve estimate; however, basic-commodities inflation, which represents the annual increase of the cost of survival, does not.

Secondly, this news comes at a time of massive, privately held debt obligations, those held by you and me, to the tune of about $45,000 per person, including women and children. Needless to say, there is no economics course that will reconcile stagnant wages, increased costs of living and a diminishment of privately held debt.

Thirdly, what does a 15.77 percent inflation rate mean? To put it in meaningful terms: if you had $10,000 in your checking account in 2000, it would be worth $2,000 in 2011, at least in terms of how much you could buy in year 2000 dollars with that money.

Moving on to mechanisms, one can cite a plethora of potential causes for this, and one should note those that are least consistent: (1) inflationary monetary policy; (2) decline in unionization; (3) “natural” market mechanisms of price-value discovery; (4) rising oil prices, as oil is a primary energy source used in the production of most goods; (5) and market disequilibrium, resulting from all above-mentioned inputs. A more thorough analysis might indicate that all these suppositions are correct, though disproportionately so.

The stagnation of wages is largely a function of de-unionization (for an economic review on the topic, see Daniel Tope et al. 2009, Thomas Lemiux 2008 and David Card et al. 2002), as is the growth in economic disparity among the top 50 percent of wage earners. The rise in oil prices is a bit more complex: On the one hand, we have vertically integrated industries whose price-value discovery mechanism, meaning the price of oil, is in gross disequilibrium with demand; on the other hand, these same industries have not significantly increased production or refining capacities in over a decade; additionally, there is a daunting prospect of peak oil that has likely already come into fruition (for review, see David Murphy et al. 2011).

Regardless of the minutia of detail for all of these economic indicators, one can certainly say that the economy is not meeting basic needs; namely, those for food, water, heating, air-conditioning and medicine. Furthermore, one can also say that this is not a problem with Democrats, Republicans or any political institution, as governments are representative of people whose common volition determines public policy, whether by force or opinion. Thirdly, though somewhat more abstract, is a clear indication that “growth economics” naturally leads to exponential growth and disparity. To give an example, if I had a $1 economy in year 2000, my economy’s value, at a 1 percent inflation rate, would increase in value to $20,900 by year 3000, with a proportionate increase in wages, debts and public obligations; this is without adding a single job or making any additional goods and services.

There are great potentials here, though. For instance, an increase in wages would not only ameliorate this problem but would also increase revenues at the state and federal level; also, this would lead to an increase in aggregate demand and, subsequently, growth of the economy back to equilibrium rates of unemployment (3-6 percent; for review, see John Maynard Keynes 1937). Additionally, price controls, instituted at the state or federal level, could diminish cost inflation of commodities through bulk demand purchase and subsidization mechanisms, which could increase the share of personal, discretionary income.

Mark Spear

Marshall, VA

Aug 10 2011 - 12:38pm

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