Last week, I ran out of ink for my printer and ordered some more online. My computer automatically pulled up the previous order, and I was shocked to see that the price of the ink cartridges I was buying had gone up 25%. To my mind, ink always seems overpriced. Manufacturers sell printers cheaply because they know that they can make lots of money on the ink. For the same reason, John D. Rockefeller’s Standard Oil is said to have sold millions of cheap kerosene lamps in order to make big profits selling kerosene. But since ink cartridges were already priced way above cost and official statistics show little general inflation, why had ink gone up 25% in less than a year?
Price hikes for a particular item here or there don’t qualify as inflation. If one thing gets more expensive but something else gets cheaper, that’s what economists call a relative price change. Inflation is a simultaneous increase in prices across the board. Some measures of inflation, such as the GDP Deflator, track price changes that affect businesses as well as those that affect consumers. But the Consumer Price Index is supposed to focus on inflation at the consumer level. And the CPI has recorded minimal increases over the past four years. Since the recession ended, the 12-month change in consumer prices has averaged 2% and has never been as high as 4%.
There are lots of other ways to gauge inflation, however, that give very different signals. Gold was $930 an ounce when the recession ended, and today it’s $1,583. So if you believe in the gold standard, prices have increased 70% in four years – or an annualized rate of 14.2%. Of course, many economists dismiss the gold price as an archaic indicator. So it may be more meaningful to look at price increases over a broad range of commodities. The Reuters CRB Commodity Index, which tracks the prices of coffee, cocoa, copper, and cotton, as well as energy, is up 38% over four years, or 8.6% at a compound annual rate.
It may well be that these increases in the cost of raw materials aren’t translating into broader inflation because the economy is so weak. For sustained inflation to get going, workers have to be able to demand higher pay to make up for increases in their cost of living. And today, whatever inflation is caused by the rising cost of raw materials is being offset by below-normal increases in wages. Indeed, that’s one of the factors causing the decline in real after-tax household income that I wrote about last week.
That may result in price stability for the overall economy, but it isn’t great news for middle-class American families. It’s true that some important costs have remained moderate. Food prices may fluctuate from season to season, but overall they have risen at only a 2% compound rate since 2009. And in the current real estate market, housing costs haven’t gone up much either. Nonetheless, many of the everyday costs that Americans face have risen a lot.
The price of gasoline has gone up from $2.60 a gallon when the recession ended to $3.68 today. That’s a 41% increase in four years, or an annualized rate of 9%. Taxes have gone up almost as much. Federal, State and Local income taxes and social charges (Social Security payroll taxes, for instance) have risen 35% over four years, an annualized rate of 7.8%.
Perhaps the most telling indicator – albeit a slightly facetious one – is the Big Mac index, popularized by the Economist magazine. McDonalds hamburgers are available in many countries and their prices reflect the cost of food, fuel, commercial real estate, and basic labor. The price of a Big Mac, therefore, can be used to compare the economies of different countries – or serve as a bellwether of inflation in a single country. Since the recession ended, the cost of a Big Mac in the U.S. has risen from an average of $3.57 to $4.37, or 5.2% a year.
So why haven’t these more rapid increases shown up in the Consumer Price Index? One reason is that the index itself has been modified in a variety of ways over the past 35 years. Fluctuations in home prices have been smoothed out, for example. And the index has been adjusted periodically to reflect changes in what people buy, particularly if they shift from more expensive items to cheaper ones. Such revisions to the CPI have tended to reduce the official inflation rate, on balance. Various estimates of what the annual rate would have been over the past four years if earlier methods of calculation had been continued come up with numbers in the 5%-to-10% range.
Several conclusions can be drawn from all this. First, there is no absolute and objective gauge of inflation. Any particular measure is simply one way of making the calculation, based on a host of assumptions. Second, a number of the costs that middle-class households face are going up considerably faster than the CPI. Printer-ink cartridges may be a particularly obnoxious example, but they’re not the only case where prices are rising more than official statistics indicate. At the moment, these trends aren’t highly visible because the economy is so sluggish. But as the recovery continues, there’s every reason to think that they will become more widespread.