By Tim McMahon, editor
It is extremely difficult to decide how over or under priced a commodity is when the scale we are comparing it to is constantly changing. By adjusting for inflation we can see what is happening to the price much easier. It pays to know what prices are in “Inflation Adjusted Terms”. Once we adjust the gasoline price for inflation we can see that the average price for a gallon of gas since 1918 in June 2010 dollars is $2.39. So it is easy to tell whether gas is currently “cheap” or “expensive”.
For instance, the Annual Average gasoline price for 2009 was $2.34, which was extremely close to the long term average price of $2.39. While in 2008 the annual average price was $3.26 with peak prices over $4.00. So even when adjusted for inflation gas prices were high in 2008. For more information on Inflation Adjusted Gas Prices see the article on InflationData.com. You will see an inflation adjusted gas price chart which shows the “nominal” or actual price that you saw at the pump compared to the inflation adjusted price (called the “real” dollar price) .
To get a bit bigger view of the overall energy situation you might want to look at the Inflation Adjusted Crude oil price Chart and an article which shows oil prices adjusted for inflation in June 2010 dollars. Adjusted for inflation in June 2010 dollars the 1979 $38 peak oil price is the equivalent of paying $107.99 today. (Note: This number is constantly changing as we adjust for inflation at the current moment.)
However, in the 2008 price run-up, the annual average crude oil price for all of 2008 was nominally 91.48 and fell much lower in 2009 to an average of $53.48. So on an annual average basis, prices were very close to 1979 but slightly below, but on a monthly inflation adjusted basis 2008 prices actually exceeded 1979 prices for a short time. There is two different ways of looking at this information. The first is an inflation adjusted crude oil price chart and the second is as an inflation adjusted crude oil price table.
In reference to the posts from MichaelD, stating that “Remember the banks thrusting adverts to the people telling them it was a great idea to borrow against their home to buy a boat or a holiday?” paints a picture of the banks being the ones who define the rules rather than being encouraged by the government and Fed to ease lending standards. The banks are still culpable to an extent, but it’s not their job to police the policies which opened the flood gates for this sort of lending, they just happened to take advantage of it.
Also, since inflation is only applicable to the money supply, I don’t believe that the term inflation can be used in reference to a price increase in individual items or sectors of the economy (energy, food, etc.). In these individual circumstances, you would need to refer to the price as increases as just that, an increase. This does not have anything to do with the money supply, since currency cannot be applied to only segments of the economy.
Speaking of the “darlings” of the economy, they were only to maintain their profits and status due to an economy that was artificially held up by the Fed’s policies. If Greenspan had (responsibly) reduced the money supply by raising interest rates (between 2003-2008), then everyone would have seen the true picture and wouldn’t have been so deluded to the real situation and probably would have altered their spending patterns to reasonable levels.
Understanding the importance of inflation, monetary policy, and the actions actually being taken by officials in any country is paramount to being able to make sound decisions. But you also need to understand the motivation of the policy makers so that you can predict if their actions are based on a true reflection of the current economic outlook, or what they are trying to force it to be. No matter how much powers these official have, they really can’t force the market to do anything for an extended amount of time, as we’ve seen time and time again.
Michael D,
There are two types of inflation. I think what you are referring to is price inflation which is the increase in prices of goods and services. There is also monetary inflation which is the devaluing of currency due to increase in the money supply. Monetary inflation tends to cause price inflation, but there are other causes of price inflation in individual markets. Such as a shortage of some commodity could cause a price increase for all products manufactured from that commodity due to the decrease and demand. Another cause of price inflation could be increase in the money supply due to expansion in the amount of credit, for example through fractional reserver banking. Whatever the cause of the price increase it is good to look at the inflation adjusted prices when comparing current prices to those of years past in order to compare apples to apples. There is a good article describing inflation here: http://inflationdata.com/Inflation/Inflation_Articles/Inflation_Definition.asp
Another thing that you said: “There is the same “value” of money in the world today as there was say 50 years ago…..”
This is not really true. The value of currency (money) is always changing due to monetary inflation. Governments physically (or digitally) print more money so there is more in circulation. This is why we have to carry more money than we did 50 years ago to buy the same things, just as you said. Also, think of an economy that is based strictly on a barter system with no money. You trade your goods and services that you produce for goods and services that other people produce. In that system, wealth is not defined as money, it is defined as the amount of goods and services which you have or can acquire. So if you work more to produce more than you consume then you are able produce more net wealth or increase your net worth. In that sense, there is a different amount of wealth today than there was 50 years ago due to more people in the world and technology. Wealth is consumed and created dynamically (people eat food, wear out clothes, cars, and houses, etc.). The poor and even the middle class tend to consume all or even more than the wealth than they create. Credit allows people to consume wealth at a faster rate than they create it. The rich tend to accumulate wealth by consuming less than they create. So really rich is not as much a function of income (see the book The Millionaire Next Door) as it is a function of net worth. Someone could make an income of $1million per year and spend $2Million per year and then loose their job or business and be left with nothing because they had not accumulated any actual wealth while someone else could make $150k per year and save and invest frugally and retire after 5-10 years of working and live without working for many years. My father is a prime example of the low income, high net worth guy as he is a prodigious accumulator of wealth. Inflation of the money supply of the government allows the government to secretly take from those who have money. For example, if I saved up $200k back in the late 1970s and retired with a planned amount of income each year but then the economy experienced hyper inflation induced by government then the price inflation would follow and my cost of living would increase such that I could not live the lifestyle which I had planned to live and may even have to go back to work. This is a reality for many older Americans. So monetary inflation is basically a hidden tax on those who have money. One way around this is to buy as many goods and services in advance that you know that you will need. That way you are purchasing them while you still have good purchasing power.
DerrielT
I think the long and short of this argument is INFLATION is caused by the “inflating” of the monetary supply by printing/creating new fiat currency of any country thereby causing the existing and new “dollars” to lose value and a byproduct of this is rising costs of EVERYTHING including housing and comodities.
You can spin this FACT any way you wish, but inflation and its brother deflation exist and have a real tangible effect on everyones daily lives.
It is a shame our country has degraded to the point where the general public are so ignorant that they cannot even grasp what is going on right in front of their own eyes. As they pay more and more every year for that gallon of milk at the supermarket or that gallon of gas at the pump, for whom they blame the sheiks, to blind to understand that our own governement and their wonderful failed experiment called the FED reserve are mostly to blame. There is a topic to spend some time on, our FED reserve, a PRIVATE bank who’s original purpose was to support the value of the US dollar and has failed miserably since its inception in 1913 as the US Dollar has now been devalued roughly 97% by, yup you guessed it, the so called “invisible” hand of INFLATION at the hand of the FED reserve all the way.
Until people wake up and look aoround them and realize our own government and their spending and the FED reserve and their so called cure “inflation” IS the problem we will continue down this road, the same road as ROME and many other historical world powers have gone down. But hey we are diferent right?
I can sum up the idea of monetizing or quantitative easing in one story…
when you are young you drink coffee, smoke cig’s and drink beers to have fun and get going to get things done and feal good, but as you grow older you drink coffe, smoke cig’s or dring beer because you have no choice anymore, you are addicted now. In the end the things that you did in the begining to have fun or get going BECOME your ILL’s and eventually left alone KILL YOU!!!
INFLATION IS THE SAME… in the begining it was to get things going, It was supposed to get us out of small recessions, It was the cure. Now we are middle aged and it is becoming the problem for our country and everything we love and left unchecked it will eventualy KILL AMERICA. GOD help us, that we should not meet this fate in the future and that some form of sanity should come back to this, the greatest country on earth.
Tim,
My ‘short’ response….
Of course, my example was an analytical one regarding selling a house in the suggested “doubling-in-value” period of 10 years.
The point there is that owning a property (in general) does not produce “TRUE WEALTH CREATIONc” which I copyrighted several years ago and which is ‘short-described’ as any wealth created above what they call INFLATION.
Additionally, I do not agree with your suggestion that INFLATION is made in reference to the increase in money supply—–it is definitely made (by our financial “wizzes”)in reference to what the general public are led to believe it is, being that it refers to the ‘inflation’ in the value of general assets, and most of the gullible public relate mostly to their own property.
A precise point in this is where I agree with your reference to something I wrote once in my own financial website, and that is your reference to the fact that a mortgage is a form of ‘forced-savings’ .
Although I did not support them, Blue Chip encouraged people to use an investment tool called “leverage” where their clients were encouraged to utilise some of the latent equity (money) in their own home property and use it to buy another property.
The theory works very well in principal, so long as there is “INFLATION”,(in reality, the effects of increased money supply known as M3) alongside the point that there had not been some form of ‘hydraulicing’ of house prices beyond the normal values that would be experienced, as a result of market (emotive) sentiment.
ie; people pushing up prices beyond “normal” with their influences of the supply/demand equation, where the demand appeared to exceed the supply because the real naughty ones (the banks) were pushing easy money on the ‘sucker-public’…!
Remember the banks thrusting adverts to the people telling them it was a great idea to borrow against their home to buy a boat or a holiday???
Or virtually posting out credit cards for you to fill in the boxes……or if you had one (or several) they would post you a letter telling you that your limit was kindly increased..!
Be aware that this “INFLATION” thingy is all a big rig-up and is directly linked to M3 (money supply).
I am an original professional Money Manager and have written a book and several papers on the topic, and it is very serious, not just because it is a valid topic, but mainly because most of the people do not understand it, or why it is there.
It is often very rigged by our financial powers.
eg; Our governor of the NZ Reserve Bank is noted as having removed houses & farms out of our CPI in a speech in Hamilton in 1998. (refer to Reserve Bank site).
The reason was because we had experienced the Asian Crisis (1996) which had brought NZ to the brink of a serious recession.
He knew the obvious, being that of the 3 main asset classes (shares/property/fixed interest-cash)there were only two within the CPI that could affect “INFLATION” (upwards)as they pumped M3 into our economy, and reduced interest rates in order to help revive the economy from recession.
Those two are of course shares & property.
He had to abide by the Reserve Bank Act which dictated that he would lose his job if he let “INFLATION” rise above the 3%pa threshold..!
Those two asset classes within the CPI which could threaten the “INFLATION” rate of 3%pa were of course shares 7 property.
So, as stated in his speech, he could not ban the NZ sharemarket…so he is stated as removing houses & farms (property) out of the CPI….!
Voila….INFLATION was held low…but not quite low enough…it was quoted as “too little too late.”
the result….he lost his job…cos they were the rules.
Now, just cast your mind back over virtually ALL of the governors of Reserve Banks in the world’s developed countries…they ALL lost their jobs…same reason.
Greenspan, Brash, the Aussi one, the Greek one, the Irish one, and most of the European ones…funny thing that huh?
No..not really that funny to me.
If this financial debarcle we all experienced had not happened, the likes of Blue Chip would still be the ‘darlings’ and no complaints would eventuate.
Likewise, Bridgecorp, and Money Managers (First Step) and so many more.
Of course there were “inside” problems there which are hopefully brought to justice, being that the bosses of those well-marketed financial thingies milked their company funds beyond reality, but most have suggested that the ‘slap over the wrist with a wet bus ticket’ dished out as acceptable punishment to the head of Blue Chip just does not cut.
the others are lined up for some justice, so let’s see if real justice is dished out as some form of satisfaction for the poor losers.
INFLATION was the main drawcard for the marketing of these failed financial institutions, however, it (in hindsight) was clearly, as now seen, abused and distorted from reality.
Markets are far from efficient, and this has been well demonstrated and proven by the false expectations of investors who expected to achieve TRUE WEALTH CREATION.
There are those who will continue to deny that their own home is an “investment” but they are just “pinochios” to themselves.
We all need to be clear that houses do NOT go up in value, in fact as you alluded to, they actually decrease in value (depreciate) and ultimately need to be rebuilt.
Fortunately the other part to your property helps to offset such a “loss” and that is the LAND that your house sits on, and it is actually that part which typically keeps in line with what they call INFLATION.
Over all time markets correct themslves up and down and sometimes the ride is more wobbly (volatile) than others, and I place that factor in line with your reference to what the Wealthy, the Poor, and the Middle class do.
The main fact to remember, is that INFLATION of assets is a fallacy, but the fact remains that we are brainwashed into believing it is a true phenomenon.
There is the same “value” of money in the world today as there was say 50 years ago…..but we need to be aware that something has been constantly happening which has resulted in the clear fact that we have to carry more cash with us in order to buy the same things (in our CPI).
Now we can see why they have produced credit cards, because we spend with them and sort of not realise how much more things cost us……because our money is constantly being purposely devalued.
Hitler had perfect timing for his rise to ‘fame’ because the German “INFLATION” rate of the day was so huge, that we all hear how you needed a proverbial wheelbarrow of money to go grocery shopping.
My suggestion is to not be one of the lemmings who flows with the flow of complaining about “rising costs” of living yet not looking behind the scenes to learn of the real reason behind it all.
The cost of “things” is not rising…it is the money to buy them with is being reduced in value…year after year.
Otherwise our primary producers (eg; farmers) would all be quickly rid of their mortgages in just weeks, instead of many of them retiring with mortgages still owing..!
Do not make the mistake of thinking it is a bit like the half full or half empty glass…!
My suggestion is to revise your thinking regarding your ‘perception’ of what they call INFLATION, and add in there your two sided coin reference because I call the financial Wizzes more two faced..and that opinion is shared by many of my colleagues when I do my thing in raising their thinking.!
I am comfortable with my full name being written.
Michael Donovan
I have researched and found that INFLATION is actually not a true event.
Otherwise, I could buy a house, and when it doubled in value (inflated) in 10 years, I could sell it and buy two in the same or similar street…!
Our Prime Minister in the mid 1980’s , Rob Muldoon publicly announced then that he was devaluing our currency by 1% per month….
THAT is what they refer to as 12%pa INFLATION….!
It is more accurate that they devalue our currency and then claim that it is INFLATION.
Your thoughts?
Michael
Michael,
First of all there is a fallacy in your logic. In your first statement you assume that somehow inflation would affect only your house not all the other houses on the street. Inflation is a monetary phenomenon and therefore it affects all commodotities denominated in that currency. Unfortunately it doesn’t affect them all equally at first but as the additional currency is distributed throughout the economy it eventually becomes more evenly disbursed. So 10 years from now it would affect all the houses on the street to a very similar extent.
But you do have a good point, inflation and currency devaluation are really two sides of the same coin. It is perfectly logical to look at the amount of currency it takes to purchase an item (the heads side) or you could look at it as a devaluation of the currency ( the “tails” side of the coin). So at the same time the same event is causing each dollar to be worth less (and eventually worthless) and also causing the amount of dollars required to buy the same house to increase. Is it a dollar (or Pound) only if you look at the heads side but not if you look at the tails? Of course not.
In the same way it doesn’t really matter if you look at the value of each dollar decreasing (devaluation) or the number of currency units to purchase a given item as increasing… the cause is the same (an increase in the money supply by the government). (Which is why they call it inflation by the way because the money supply is inflating see What is the real definition of inflation? not because the price is inflating as most people suppose). And the result is the same, i.e. the government gets to spend money at the early part of the cycle before people realize that they are worth less and so in effect the government has stolen a portion of your purchasing power without your knowledge or consent.
Another true lesson from your example that is that a house that you live in is not actually an investment. It doesn’t really appreciate. On average it only keeps up with inflation and only actually increases in value if you add improvements to it. It is like any other consumer item it tends to depreciate as it gets older and falls apart. Income real estate on the other hand is actually an investment. Income producing real estate generates rental income which is used to pay off the mortgage. So eventually the real estate will be debt free and the owner can keep all the income for himself.
The only thing a house you live in is, is a forced savings plan. You have to make your mortgage payment every month and a small portion of your payment goes towards the principle and so the value of your portion is steadily increasing. But you are also paying real estate taxes, and maintenance and performing upkeep for the priviledge. For more info on this see: The Wealthy Buy Assets, the Poor Buy Liabilities, and the Middle Class Buy Liabilites Believing They Are Assets So a sort of odd way of looking at a house purchase is that you are paying rent for a place to live and have a forced savings plan that goes into a commodity (a house) rather than into a bank. The only advantage is that commodities tend to keep up with inflation while dollars deposited into a bank do not.