Wednesday, July 23, 2008

For Some Products, Prices Have Been Falling

Rising food and energy prices have received a lot of media attention lately, along with concerns about the threat of inflation. The chart above (using BLS data via Economagic) shows a sample of products that have experienced significant deflation in the last ten years (as well as deflation in the last few years in almost all cases), double-digit percentage decreases in all cases except for new cars (-3.4%).

Then considering that average hourly earnings have increased by almolst 40% over the last ten years, the real prices of those products have fallen by an even greater amount, a HUGE amount. In other words, there are many, many products like computers, cameras, new cars, clothing, TVs, appliances, electronics, software, etc. that are significantly cheaper today than ten years ago, especially after adjusting for increases in earnings.

One reason we don't pay much attention to these price decreases is probably that they happen so gradually and consistently over time, so we either a) don't notice the savings, or b) take it for granted and don't appreciate the incredible savings over time in many of the products that we all buy.

Or maybe it's also because we buy computers, TVs, appliances, new cars INFREQUENTLY (every 5 year or more in some cases), and don't notice or appreciate the price decreases the same way we notice price changes for food and fuel that we purchase FREQUENTLY?

But there does seem to be a certain degree of misperception among the general public and media that ALL prices are going up, which is clearly not the case.

35 Comments:

At 7/23/2008 10:37 AM, Blogger juandos said...

BTW speaking of the cost of cars you may be interested in the following from Forbes: In Pictures: America's 12 Cheapest Cars

 
At 7/23/2008 10:39 AM, Anonymous Anonymous said...

No, one reason we don't notice the price decrease is these are non-essential items. Unlike, food, gas, healthcare, tuition and even homes which are still overpriced despite falling values.

So the 60" plasma has dropped in price, big deal, it's still more expensive than the 24" tube T.V. that should be good enough for any couch spud.

 
At 7/23/2008 11:00 AM, Blogger David said...

I'm suspicious of the "computer" numbers. Ninety percent? So a computer that would have cost $2000 in 1998 now costs $200?

I bet what was actually done here was a "hedonic adjustment" for faster processor speeds & more RAM, etc. But in the real world, (a)many people don't need faster CPUs; they're just doing word processing & e-mail, and (b)much of the extra capacity has been gobbled up by the increasingly-piggish operating system woftware.

 
At 7/23/2008 11:39 AM, Anonymous Fred said...

My ISP just raised the cost of my DSL line by 30%

 
At 7/23/2008 12:15 PM, Blogger juandos said...

Hey david I've got a scanned picture of an old advertisment (1989) of a Tandy 5000 MC Professional System that listed for (are you sitting down?) $8499.00 for a system with a 20 Mhz 80386 processor, a 256k color graphics capability, and NO mention of a hard drive...

No hedonic adjustment there...

fred says: "My ISP just raised the cost of my DSL line by 30%"...

AT&T fred?

I also received notice about my DSL going up but not by 20% but not far from it...

Cable internet service is still more than twice as expensive as DSL is locally though...

 
At 7/23/2008 12:23 PM, Blogger PrestoPundit said...

As output increases relative to inputs, i.e. as productivity increases, prices go down. It's a benign process, mostly not understood by "math jock" idiot savants in the economics profession.

If the government and the bankers weren't stealing from us all of the time via an uncalled for expansion of the money supply, general price levels also would be falling, in line with the ongoing massive increases in productivity.

The problem to be explained isn't, "why is there deflation in some sectors?", the problem to be explained is "why isn't there overall (benign) deflation in the economy?"

And the answer is: because of mismanagement of money by the Fed, and the thieving of our wealth via the Fed by the government and the big money folks.

 
At 7/23/2008 1:08 PM, Anonymous Colm O'Connor said...

Notice how the more necessary the goods become, the more inflation there is.

Computers are luxuries. Food and housing aren't, and they're the ones that have gone up the most.

 
At 7/23/2008 4:29 PM, Anonymous Anonymous said...

Thanks for the link juandos. 1 out of the 11 cars from the US.

 
At 7/24/2008 9:23 AM, Blogger spencer said...

Actually the Chevy is manufactured in South Korea by GM Daewoo.

 
At 7/24/2008 9:35 AM, Anonymous KCuz said...

Excllent post.

This ties in well to my theory about the rising costs of health care. We spend more on health care than we have in the past simply because we can afford to do so.

 
At 7/24/2008 11:01 AM, Blogger juandos said...

"We spend more on health care than we have in the past simply because we can afford to do so."...

Interesting point kcuz but for the longest time I thought one of the major reasons for the rising cost of health care was due to the cost of malpractice insurance...

Apparently these folks have a very different idea...

 
At 7/24/2008 1:40 PM, Anonymous KCuz said...

Juandos,

Malpractice insurance is certainly a problem and a piece of the puzzle. I would simply argue it's a small piece of the puzzle.

By the way... high drug prices (in and of themselves) are not the problem either. It's the fact that we want drugs at a moment's notice.

 
At 7/24/2008 4:44 PM, OpenID sethstorm said...

When you're given what is lower quality than the previous generation, there is going to be a price drop.

I'd like to know where the quality went without hearing some "market" excuse.

 
At 7/24/2008 7:11 PM, Blogger juandos said...

sethstorm says: "When you're given what is lower quality than the previous generation, there is going to be a price drop"...

Lower quality what?

Doctor care?

Drugs?

If its doctor care I then have to ask, what were the number of patients per doctor in the, 'previous generation' as compared to today?

I don't know and I'm not sure how to seek out that sort of info...

Any ideas?

BTW I don't know that the quality of modern medical care has deterioated...

It might have a lot to do with population densities versus numbers of doctors... Just guessing...

kcuz says: "high drug prices (in and of themselves) are not the problem either"...

Well I do know from some first hand experience just how expensive it is to get a drug to market...

I used to do a bit of part time IT work for Bayer here in St. Louis county (since moved when it became wholly owned subsidary of Bayer AG) I found out how many hundreds of millions of dollars went into investigating a potential drug and the testing cost...

It was rather shocking...

 
At 7/24/2008 7:41 PM, OpenID sethstorm said...

Juandos:
I was referring to goods versus services.

 
At 7/25/2008 7:11 AM, Blogger save_the_rustbelt said...

Was the increase in real wages spread evenly across all Americans?

All Americans are consumers.

Not all Americans received an increase in real wages.

 
At 7/25/2008 7:20 AM, Anonymous john said...

The BLS does indeed hedonically adjust PPIs. That drop of 90% in computers reflects the exponential increase in computing power you get for your dollar.

The adjustment is probably responsible for a lot of the decline in the other items listed, save clothing, cars, and maybe cell service.

 
At 7/25/2008 8:12 AM, Blogger Michael said...

Don't you mean, "For some products, prices have been falling"?

 
At 7/25/2008 8:30 AM, Blogger Jody said...

A different view:

The more heavily involved the government is in an economic sector, the greater the inflation. Little involvement (e.g, software) leads to effective deflation. Significant involvement (e.g., food, energy, medical, education) leads to significant inflation.

related aside: I'm convinced that the key to economic growth is the emergence of new sectors, primarily because a new sector has not had the time to build up a significant "plaque" of government regulation.

 
At 7/25/2008 9:54 AM, Anonymous Anonymous said...

Apple II
48K ( yes 48k) ram
green monitor 13"
40 column
Applesoft( one year before it still used integer basi , no decimal point)
1854$
Year 1983

 
At 7/25/2008 12:25 PM, Anonymous tangino said...

Half of these are manufactured [technology] goods, the pricing is probably an indication of competition and manufacturing efficiencies (outside the U.S.). Global free trade have served the American consumer well.

 
At 7/25/2008 1:42 PM, Blogger Mark J. Perry said...

In response to several comments, I have changed the title of the post to "For Some Products, Prices Have Been Falling."

Please keep in mind that I usually try to fit the title of each post on ONE LINE ONLY (like a newspaper headline I guess), instead of wrapping it to two lines - the title seems to look neater and cleaner on one line. Therefore, I sometimes have to make compromises and adjustments to make that happen.

In this case, "For some products, prices have been falling" is more accurate than "For some products, there's been major deflation," but the latter seemed like a better headline. I stand corrected.

 
At 7/25/2008 5:09 PM, Blogger juandos said...

save the rust belt says: "Not all Americans received an increase in real wages"

Were all American worth an increase in real wages?

sethstorm says: "I was referring to goods versus services"...

O.K. so which is the lower quality of this generation, goods or services?

 
At 7/25/2008 10:40 PM, Blogger hfail said...

As someone who is an avid fan of the role of science and technology on our lives, I've certainly noticed and enjoyed this trend.

But while technology is absolutely useful, and I've always argued that most scientists and engineers do not get their due in society (vs. bankers for example), I think technology is not always a good gauge of economic policy.

Let me give you an extension of your thinking. In the early part of the century, viable air conditioning and refrigeration technology first became available for home use. At the start, only affluent people could afford this while today even residents of public housing will demand air conditioning and refrigerators.

My point here is that technological change is usually incorporated into our needs, and even our concept of what are necessities. Many economists treat technological as the great exogenous 'freebie'. There is also the old rule in economics that wants are unlimited, or rather, that wants can be expansive given supply.

Yes, computers are cheaper now. But also far more mandatory (with most families owning several). Along with computers, many other items have become staples that were luxuries or non-existent, such as the iPod. Flat screen TVs are now cheaper than flat screen TVs 5 years ago, so many households are spending the money they would have spent on CRT or projection TVs to flatscreen. In many cases, technology has found ways to create more demand.

But even in cases where total spending has gone down in some categories, more disposable income is spent in other categories, especially in the case of positional goods (the best 10 restaurants in the city, the best locations for a home, etc.).

People are, yes, materially and technological better off now. But that is old news, and a built-in assumption following several hundred years of continual technological innovation. We are materially better off in 2007 than we were in 1997, and certainly than in 1907. But we expect this, i.e., we expect our real GDP per capita to have grown over these periods. But we have factored iPods into our lives the way we did the car 50 years ago, and the sewing machine 100 years ago.

People like improvement and hate decline. Perhaps that is why a survey of Chinese urban households shows them more content (by the same metrics) as the same survey of Americans, even though on an absolute level, Americans are more wealthier (this also indicates perhaps that other non-material affect wellbeing). But the question still remains: how much better off (if at all) are we going to be in 2008, in 2018, given competition for oil and other commodities, given rising economies/prices in the emerging markets, given the baby boomers retiring, and given the long process of deleveraging the US is going to undertake. And that is where the debate about deficits and inflation start...

Beijing, CN

 
At 7/26/2008 2:48 AM, Anonymous Mark Harrison said...

David,

The computer numbers have, I think, some hedonic component.

However, I still remember sitting in a bar with the IT Director of a major UK company in about 1996. She was celebrating the fact that her new procurement deal meant that should could now get Windows PCs for £1000+UK taxes.

The last PC I bought cost £155+taxes.

 
At 7/26/2008 5:47 AM, Anonymous TomG said...

I think David and Fred's comment have hit the problem with this analysis - of how to make it truly apples-to-apples. Indeed I can buy a better printer for far less *initially* than ten years back, but now try to find cheap toner, print cartridges, etc to keep it going. What ends up being its *true* cost stream over time? Even my Atra razor had a great luring price - and now I feel like I'm buying in Ft. Knox to try getting more blades at a convenience store, their being so expensive. And when PCs were so pricey in the 80s, it was a luxury item that few could afford. Now it's become almost essential to most employed households - a different qualitative state and thus an apples-to-fruit demand comparative at best, that's not easily discernable. If you add in all the features/services needed to keep a PC effectively (up-to-the-times) operational, it's hard not to conclude that it sucks a lot more out of the average household's income than ever.
Cheers, Tom

 
At 7/26/2008 4:41 PM, Anonymous Anonymous said...

Obviously, the autos have hedonic adjustment as well. No way their price has fallen in 10 years.

 
At 7/27/2008 12:57 AM, Blogger Paula Hall said...

What is so amazing about this chart is that it shows how increased productivity improves our standard of living. I figure that the reason we don't see basic necessities on the list is because the standard of living is increasing around the globe -- up to the level where people who were dirt poor now compete with U.S. consumers for basic staples.

 
At 7/27/2008 5:43 AM, Anonymous TomG said...

"and they all lived happily ever after" (isn't it fun :)

 
At 7/27/2008 10:19 AM, Blogger OBloodyHell said...

> Obviously, the autos have hedonic adjustment as well. No way their price has fallen in 10 years.

Massive increases in safety, reliability, and comfort features.

Before the SUV market collapsed, most SUVs were being offered with one or more built-in video screens and associated DVD players, POWER "disappearing" seats (i.e., so you didn't have to manually remove them to make a large open space for porting large objects, like a washing machine or something) and independently adjustable cooling (i.e., so one person could be cooler while another, whose metabolism was different, didn't have to freeze).

This is to say nothing of the six or eight "plus one" speaker multi-dvd MP3 & IPod compatible surround sound system, GPS, and rearview-cameras, power sunroofs. They didn't come with free oral sex, but I hear that was slated for the 2010 models...

You could argue whether or not people "wanted" these things, but clearly a lot of people were adding them to the car, or they would not have been worth including in the packaging.

 
At 7/27/2008 10:30 AM, Blogger OBloodyHell said...

> I'm suspicious of the "computer" numbers. Ninety percent? So a computer that would have cost $2000 in 1998 now costs $200?

MUCH less, david, if you could still buy such a lame machine.

We've probably hit a bottom price plateau right now, because around $200-250 is the minimum it's worth just to assemble and support such a unit, so they tend to bundle lots of new "features" (software+hardware) to increase the price to that and preferably more.

I generally would not buy a system for less than around $600, offhand, but you can get them in the $200+ range.

If you really, really want, I might be able to dig up an advert out of an old magazine or two to give you some vaguely comparable numbers -- I think it's better to compare a bottom-end system from Dell then vs. one now, or something similar to that. You will see a substantial improvement in capabilities/power, plus a notable reduction in price that is a defacto decrease in cost on the order of 30x, actually, just from Moore's Law.

The thing to realize, david, is that computers and most electronics are just highly organized and very carefully dirtied sand. So the basic manufacturing component covers the world's beaches.

 
At 7/29/2008 9:41 AM, Blogger Marianne said...

Wait a minute!
How many of those products are Necessities?
Sure some are, i.e. cars, but not new cars. You are wasting time looking at things that are dropping to boost lagging sales.

 
At 7/29/2008 9:45 AM, Blogger Matt said...

It'd be interesting to know how much money consumers spend on goods whose cost is rising vs. falling. Picking up on the observation that prices seem to be rising on essentials and falling on luxuries, you'd expect that ratio to vary a lot with socioeconomic status, which would suggest that the poor are proportionally harder hit by current price fluctuations -- the larger a proportion of your budget you're spending on luxuries, the more the drop in luxury prices is able to compensate for the surge in essentials' prices.

 
At 7/30/2008 12:54 PM, Blogger Tom said...

Help me our economists. When my daughter went to college 5 years ago the required computer with software and warranty cost $3,000. Last year my son went to the same school and his computer cost $3,000. His computer may be faster and as a result he can finish his homework 45 seconds faster than his sister and thus be able to play more Halo 3. AnY way you look at it I was out $3,000 for each child. Where is the benefit to me of falling computer costs per instruction?

 
At 8/01/2008 3:22 AM, Anonymous astudent said...

Tom-
The benefit would have been if you had bought the same exact computer for your son that you bought for your daughter. He might not have been happy not having a top of the line computer, but it would have gotten the job done, and the benefit to you would be that the computer you bought for $3000 5 years ago likely would cost $300 or less now.

A required computer by the school sounds a bit odd, but I'll take your word for that. For all I know, it could be some graphic design school or something that would take advantage of that increase in power and there would be a noticeable benefit, but who knows.

(And $3k for a computer!? I built my gaming(read: a decently high end computer) computer last summer(I'm no computer guru, it really is just about plug and play, try it and save some money), and two weeks ago bought a laptop for school. Together they don't even come out to $2k. Would be interesting to hear what you bought for that much.

 

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