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Memories of the 28th Century

Measuring Inflation

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First income distribution, then wage inflation, and now measuring inflation.

Inflation: Noun Economics. a persistent, substantial rise in the general level of prices related to an increase in the volume of money and resulting in the loss of value of currency (http://dictionary.reference.com/browse/inflation?s=t‎) In my last post I showed examples of two types of inflation, wage inflation and Consumer Price inflation, but there are several other kinds of inflation, including the loss of value in currency as shown from a GDP (Gross Domestic Product) deflator, but similar indices can be taken from the value of gold (or another commodity) or from foreign exchange. If one is looking for ways to quantify the historic changes in value of currency, then prices of anything can work; I amuse myself by remembering the price of a candy bar in the 1950’s when I buy a similar candy bar now for more than ten times the price, and I also recall having paid $0.45 for a pack of cigarettes that goes for almost $10.00 now, but punitive taxes make up the lion’s share of the price and the increase in price for the cigarettes, as the government seeks to tell people how to live their lives. I also wanted to show the change in value of the dollar in foreign exchange, but I couldn’t find a table that was long enough to be useful.

To show an inflation index one needs to set something as the standard, and it is best for the standard to have been available for a long time in its present configuration. Then one must decide on the denomination in which the index will be expressed. Since I am in the U.S.A. I am using U.S. Dollars, such as they are.

The main point of this exercise in formatting tables is that there is no single measure of inflation. And I have not exhausted the possibilities. So I think it time to think about one of the tasks assigned to the Federal Reserve Bank, maintaining price stability. The Fed has not maintained price stability. For most of the last one hundred years the Fed has encouraged inflation at a rate that would be advantageous to the U.S. government. The Treasury sells fixed rate bonds, and it is cheaper to repay the bonds with inflated dollars.

Below I have put some inflation indices side by side. To make them more readily comparable, I have made 1941 the index year set to 1.00.
I put this table together from a variety of sources. None of the data sets were complete, and I can’t vouch for the accuracy of any. The gold index is from data on onlygold.com, and I believe that it is London prices converted to U.S. Dollars. The other data is from U.S. Government sources, except for the GNP, which the Feds have dropped.


...............................GDP.........GNP price
Year gold index......deflator........index........CPI....... .wages.......Average ......Ave. w/o gold
2011...43.1267......12.5936......................1 5.6186.....21.3556....23.1737......16.5226
2001....7.7887.......10.0842...................... 12.4184.....17.7496....12.0102......13.4174
1991....9.9478........8.2945...................... ..9.5461.....12.0148......9.9509......9.9519
1981...11.2676.......5.7308....................... .6.1702......7.4256.......7.6486......6.4422
1971....1.2563........2.7873......2.9939........2. 8226......3.3024.......2.6326......2.9766
1961....1.0000........2.0941......2.2157........2. 1134......1.8383.......1.8523......2.0654
1951....1.1267........1.6976......1.8142........1. 8014......1.1959.......1.5272......1.6273
1941....1.0000........1.0000......1.0000........1. 0000......1.0000.......1.0000......1.0000
1931....0.5822........................0.9483...... ..1.1276.......................0.8861......1.0380
1921....0.5822........................1.1535...... ..1.3475.......................1.0278......1.2505
1911....0.5822........................0.6155...... ...................................0.5989......0.6 154
1901....0.5822........................0.5116...... ...................................0.5469......0.5 116
1891....0.5822........................0.5189...... ...................................0.5506......0.5 189
1881....0.5822
1871....0.6363
1861....0.5822
1851....0.5822
1841....0.5822
1831....0.5461
1821....0.5461
1811....0.5461
1801....0.5461


The averages are interesting. Inflation has really taken off recently, and gold is a large part of that, but even without gold it sure has taken off, but part of that is just the wonder of compound interest. But it turns out that the ten cent candy bar for a dollar or more and the bottle of Coca Cola for $1.75 make perfect sense; they are in the range of the scales, well low end of the range. The overall average shows a compounded annual rate of inflation of 3.9%. Even the best dinner in town for $0.10 in 1830 is fairly close to the scale, but there isn’t a CPI for that far back. It is interesting to recall that from the 14th century to the 19th century there was little inflation in most of the world places, where there was a money economy. But even the money economy was closer to being barter, because the money was metal or backed by metal.

So what does it mean? It means that things aren’t what they were, and inflation is what you regard it as being. Maybe I should have done some more research and used the Big Mac scale. The Economist has been using the Big Mac as an indicator of real exchange rates for decades now, and that it a worthwhile scale; it is a product that is essentially the same product as it was back when it was introduced. As it is, I am not satisfied with any measure of inflation, but most indices provide some indication of inflation.

I would have liked to have a foreign exchange index also, but I didn't find any data that would readily go into a table.

So what do you think?

Updated 12-01-2013 at 05:32 PM by PeterL

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