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YOU DECIDE: Is inflation out of control?

June 14, 2007

By Dr. Mike Walden
North Carolina Cooperative Extension Service

MEDIA CONTACT: Dr. Mike Walden, 919.515.4671 or michael_walden@ncsu.edu

Dr. Mike Walden
Media representatives: For a black-and-white or color copy of this photo, call 919.513.3127 or e-mail dave_caldwell@ncsu.edu.
With gas prices up again this season, it's easy to get depressed about consumer costs.

In fact, most folks I come across have the general feeling that if gas prices rise, other prices eventually must follow. Does that mean it's just a matter of time before we're back -- as we were about 30 years ago -- to double-digit inflation?

Before you accept this conclusion, let's a take step back and look at what's happened to prices since 2000, the year many economists think really represents the start of full-blown globalization; the year China and other Asian and Eastern European countries entered the world's trading system. It's also the year gas prices started their relentless upward climb.

Total retail level inflation since 2000 has averaged 2.7 percent per year. In other words, the average of prices paid by consumers for products and services rose 2.7 percent annually since 2000. That's actually a fairly low rate, historically speaking. It's also nowhere near the 10, 11 and 12 percent inflation rates we saw in the late 1970s and early 1980s.

Certainly gas prices have gone up more. Indeed, the increase in gas prices has averaged almost 10 percent a year since 2000. Other big jumps are recorded for medical care and electricity prices, up an average of 4.4 percent and 4.8 percent respectively in each year since 2000.

But if you bought anything technological, from TVs to computers to cell phones, guess what? Those prices have actually dropped since 2000! Cell phone prices are declining an average of 2 percent per year, TV prices are falling at the rate of 8 percent annually, and computers are plunging in price 10 percent a year. In fact, if you waited to buy a computer in 2006 instead of in 2000, you would have saved 75 percent! And while I'm at it, let me throw in appliances. They're also cheaper today, by about 10 percent, than they were six years ago.

Two forces are responsible for the good news about prices of tech products.

First, the manufacturing process for their production usually improves in efficiency and scale over time, thereby pushing prices down. Second, many foreign producers with lower costs entered these markets in recent years, and U.S. buyers have been the beneficiaries.

Consumers enjoyed lower prices in two other major product groups this decade.

One is clothing. Clothing prices are falling at the rate of about 1 percent per year. Here the reason appears to be international producers. As is well known, especially here in North Carolina, a significant share of our apparel manufacturing has now moved off-shore, especially to China and other Asian countries. Again, due to their lower costs, they can make and sell clothing at cheaper prices. In fact, clothing prices started dropping after the NAFTA and GATT trade deals of the mid-1990s.

The other -- and I'm sure this will surprise many of you -- is vehicle prices. The prices of both new and used vehicles have fallen this decade: new at about a 1 percent per year rate, used at an almost 2 percent annual rate. Incentives and other bargaining chips offered by dealers are a big part of the reason.

Other prices have gone up this decade, but less than the overall average rate of inflation, so they have become relative bargains. Recreational products and services, personal care products and airline fares are three examples. Prices for groups like financial services, professional services and housing have risen a little more than average inflation, but still nowhere near as much as gas and medical care.

What's the message here?

I think there are two. First, recognize that all prices don't move in lockstep. Some rise faster, some slower, and some actually fall. Second, following the news on those prices that are increasing fastest -- like gas prices -- and assuming they are representative of all prices can give you a very distorted view of the economy.

I think these are pretty good lessons to learn. You decide if I'm right!

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Dr. Mike Walden is a William Neal Reynolds Professor and North Carolina Cooperative Extension economist in the Department of Agricultural and Resource Economics of N.C. State University's College of Agriculture and Life Sciences. He teaches and writes on personal finance, economic outlook and public policy. The Department of Communication Services provides his You Decide column every two weeks. Earlier You Decide columns are at http://www.cals.ncsu.edu/agcomm/writing/walden/decide.htm

Related audio files are at http://www.ces.ncsu.edu/depts/agcomm/writing/walden/index.html

Posted by Dave at June 14, 2007 08:38 AM