Friday, February 18, 2011

For Some Products, Prices Have Been Falling


Item% Change Last Year
TVs-17.81%
Photographic Equipment, Supplies-10.50%
Software-10.34%
Computers-6.86%
Toys-4.65%
Sports Equipment-4.11%
Cell Phone Service-4.03%
Leased Cars-3.86%
Appliances-3.39%
Audio Disks-2.81%
Clothing: Infant and Toddler-2.78%
Video Audio-2.62%
Pets and Pet Supplies-2.54%
Tools and Hardware-2.12%
Video Disks-1.95%
Stationery-1.54%
Nonprescription Medical Supplies-1.43%
Clothing: Women and Girls-0.88%
New Cars-0.78%
Footwear-0.72%

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 deflation in the last year (January 2010 to January 2011).   

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 falling prices, or b) take it for granted and don't appreciate the incredible savings over time in many of the products that we all buy. There are many, many products like computers, cameras, new cars, clothing, TVs, appliances, electronics, software, etc. that are significantly cheaper today than a year ago, and are probably cheaper today than five years ago and ten years ago in many cases.

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 mis-perception among the general public and media that ALL prices are going up, which is clearly not the case. And since inflation is a period when most prices (and wages) are rising, I don't think we're anywhere close to meeting that situation yet.  Not as long as so many prices are declining, not rising.

Update: See today's front page WSJ article "Split in Economy Keeps Lid on Prices," here's a quote:

"The conflicting forces: Soaring commodities costs world-wide are pushing up prices for many goods, while a slowly recuperating U.S. economy, soft housing market and a persistently high unemployment rate are holding down prices for U.S. services.

Goods prices were up 2.2% from a year earlier, paced by jumps in food and energy prices, according to the Labor Department's January consumer-price index, and are rising faster than they did before the recession. But services prices were up only 1.2% from a year earlier, far below the 3.4% inflation rate registered for services between 2000 and 2008."

19 Comments:

At 2/18/2011 9:37 AM, OpenID murosgroup said...

its very interesting how they count price changing for software, cars etc because such products in short time has a lot of differences, so "old" models (1 year) of course costs cheaper

 
At 2/18/2011 9:53 AM, Blogger morganovich said...

how about including health care on your list?

it is 1/6 of GDP after all.

 
At 2/18/2011 10:13 AM, Blogger PeakTrader said...

Quality improvements, low interest rates, and rising incomes also effectively reduce prices.

 
At 2/18/2011 10:36 AM, Blogger Che is dead said...

"... the definition of inflation is a period when all prices are rising on average (including wages)"

Yes, that's true. Unfortunately, it offers little comfort to consumers who are experiencing something akin to the medieval rack torture. As prices for essentials - like food and energy - rise they have less disposable income with which to purchase the nonessential goods that you highlight, dampening consumer demand and putting pressure on manufacturers to keep labor costs contained as commodity input prices rise. So, even though the overall inflation rate may be low, the pain being experienced by consumers is real.

 
At 2/18/2011 10:55 AM, Blogger William said...

Not only are prices for many of these good are cheaper, but the value for $1 is also better. In many cases, you are buying a more advanced appliance for less dollars.

 
At 2/18/2011 10:58 AM, Blogger dmacp said...

I wonder if there is also a component to demand at work here. After all, unemployed people, or people worried about there job situation, foreclosure, etc. are not the most likely people to buy new large screens and computers.

 
At 2/18/2011 11:01 AM, Blogger rjs said...

see, if you're confused & think inflation is already getting out of hand, its because you're spending too much of your income on eating, gasoline and heating...to avoid inflation, you should be spending much more on furniture, appliances, entertainment, electronics and new cars, and borrowing more to do it...

 
At 2/18/2011 11:19 AM, Blogger PeakTrader said...

Some prices rise and some fall, which result in the following:

Consumer Price Index - January 2011
February 17, 2011
BLS

Over the last 12 months, the all items index increased 1.6 percent before seasonal adjustment.

The index for all items less food and energy has risen 1.0 percent (over the past year).

 
At 2/18/2011 11:26 AM, Blogger PeakTrader said...

Briefing.com: Personal Income and Spending
31-Jan-11

Core PCE prices remained weak and showed no growth in December. On a year-over-year basis, core PCE prices are up just 0.7%, which is the lowest on record.

(PCE is comprised of three categories: durables, nondurables, and services).

 
At 2/18/2011 12:07 PM, Blogger Buddy R Pacifico said...

morganovich asks: "how about including healtcare on your list?"

The price increase vs. decrease debate is complicated by the divergence of goods and services. Here is a recent chart by Scott Grannis that shows the opposite direction of prices for durable goods vs. services.

 
At 2/18/2011 12:33 PM, Blogger morganovich said...

rising wages are thin comfort to those on fixed incomes or who have significant savings and must sit and watch their value erode.

 
At 2/18/2011 1:32 PM, Blogger geoih said...

All this report illustrates is the complete idiocy of trying to use prices as an objective measure of inflation.

Prices are subjective measures of value as determined by individuals. Aggregating prices of different items over time gives you a number that means nothing.

Perhaps people should review the laws of supply and demand, and marginal utility. These same laws apply to money.

 
At 2/18/2011 1:43 PM, Blogger morganovich said...

peak-

"Some prices rise and some fall, which result in the following:

Consumer Price Index - January 2011
February 17, 2011
BLS ...."

no. that is not what they result in at all.

to get that number, you have to adjust prices down for imagined improvements in quality in a one sided and utterly subjective process, then you have to under express all the items that went up in price and over express all those that go down.

the "some go up some go down" idea you are suggesting is how it used to be done.

suing that methodology, inflation is currently well over 8%.

why are you so resistant to actually looking at the methodology the BLS uses? you just keep repeating their results over and over like some sort of mantra, but do not seem the least bit interested in how they got to that number and whether or not it makes sense.

 
At 2/18/2011 1:54 PM, Blogger juandos said...

Hmmm, well I don't know where the BLS went and polled for pricing on goods and services but they obviously didn't get a chance to stop in Missouri and check out the prices for the last six months...

Not one of those price declines can be detected around the St. Louis area...

 
At 2/18/2011 4:19 PM, Blogger PeakTrader said...

Morganovich, the GDP Price Deflator and CPI show similar results:

"The implicit GDP price deflator is a measure of the aggregate price level for the economy...reflects up to date expenditure patterns... A fixed market basket measurement would miss this change...In practice, the difference between the deflator and a price index like the Consumer price index (CPI) is often relatively small."

National Income and Product Accounts
Annual 2010
JANUARY 28, 2011
BEA

Real GDP increased 2.9 percent in 2010...Current-dollar GDP increased 3.8 percent in 2010...The price index for gross domestic purchases increased 1.3 percent in 2010.

 
At 2/18/2011 6:04 PM, Blogger Gene Hayward said...

All/most of these goods have things in common. They are subjected to international competition and are not subjected to heavy government regulation nor subsidized to a large extent. Look at all the items in the CPI that have risen in price dramatically over time and you cannot say the same. Seems kind of obvious to me.

 
At 2/18/2011 7:59 PM, Blogger PeakTrader said...

Also, I may add, quality adjustments in the CPI are reasonable and most likely continue to overstate the true inflation rate, although by less:

Common Misconceptions about the Consumer Price Index
BLS

Critics often incorrectly assume that BLS only adjusts for quality increases, not for decreases, and that hedonic adjustments have a large downward impact on the CPI. On the contrary, BLS has used hedonic models in the CPI shelter and apparel components for roughly two decades, and on average hedonic adjustments usually increase the rate of change of those indexes.

Frequently Asked Questions about Hedonic Quality Adjustment in the CPI
BLS

A fundamental problem for the goods and services in the CPI sample is that their characteristics, not just their prices, change over time as the retailers introduce new versions of items and discontinue the older versions. In many categories of items, this is the primary time when price change occurs. The new version of the item may provide additional benefits or, in some cases, reduced benefits. This change in benefit is quality change.

 
At 2/20/2011 12:16 PM, Blogger VangelV said...

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 falling prices, or b) take it for granted and don't appreciate the incredible savings over time in many of the products that we all buy.

Try living in the real world. There, the average family is worried about more important things first and then move on to the kind of goods on this list. Food, shelter, taxes, health care, transportation, insurance, and tuition are higher up on the scale than purchasing a new TV. Most of those things have gone up in price which is why mainstream Americans are seeing a level of inflation that is not being accounted for by the BLS and the elite in politics or the media.

Yes, I can buy a phone at a lower price than I could last year. But to use it I have to buy a more expensive service that what I needed for my basic phone. The fact that the basic service and the one I am using now fell by 6% last year does not help my overall bill, which has gone up substantially. And then there is the cost of all of the apps that I want on my phone. While they are very cheap they add up and my family winds up spending as much on new software each year than it does on the hardware and service.

The same is true for my cable bill. While the cheaper TV is great I need to buy a new piece of expensive hardware to use it properly and need to increase my subscription prices by 20-30% over what I had previously. This means that my entertainment cost went up even though the hardware that delivers it is shown to have gone down.

The price of computers is lower but to use them as designed I need to spend another 20% more on faster internet service and buy new versions of the software that I used previously. I also need new external hard drives and entirely new software that makes everything work better. Those costs dwarf the entire hardware purchase.

You keep making the same error because you ignore the fact that when unique individuals make choices aggregation is logically impossible. Smart people can use data and statistical tricks to come up with any conclusion that they want to sell. You also ignore the fact that when governments impose obligations on individuals their total costs can go up even as individual prices do not seem to be going up. When I am forced to pay more for something that I did not want and do not find of use the fact that it went down in price does not mean that I am paying less.

 
At 2/20/2011 2:34 PM, Blogger Ron H. said...

"The price of computers is lower but to use them as designed I need to spend another 20% more on faster internet service and buy new versions of the software that I used previously. I also need new external hard drives and entirely new software that makes everything work better. Those costs dwarf the entire hardware purchase."

Good point. I agree. Another consideration is that over the years, as hardware capability has improved by orders of magnitude, software packages become ever more bloated and wasteful, because developers aren't forced to make the best use of the available resources.

You won't get a doubling of throughput by doubling your computer speed, as new software is wasting some of that increase. I wonder if the BLS accounts for that in its hedonic value calculations?

 

Post a Comment

Links to this post:

Create a Link

<< Home