Yogi Berra, Mae West and the CPI

Thu, 20 Feb 2014

What’s a Dime Worth?

According to Yankee great (and the most quotable guy around) Yogi Berra, “A nickel ain’t worth a dime any more.”  Have you ever wondered what money is worth today compared to the past?  How about the dime that has been hiding in your dresser “junk drawer” for the past 20 years (along with old Powerball tickets and fading gas station receipts)?  If you go to the Bureau of Labor Statistics websiteThis is a third party link. Please review the third party content guidelines for more details by clicking here. there’s a way to calculate it.  You just fill in the blanks (10 cents, 1993 and 2013) and hit calculate.  The dime that was worth a dime 20 years ago has only 6 cents of purchasing power today.  You can do this for any pair of years going back to 1913.  So, Yogi wasn’t too far off, I think.  


The Consumer Price Index

My calculation was based on the Consumer Price Index (CPI) which is used, among other things, to compute how much more (or less) it costs to maintain a specific standard of living.  The Bureau of Labor Statistics  (BLS) gathers monthly data on the prices paid by a typical household for thousands of goods and services that include your morning newspaper, food, transportation, college tuitions, out-of-pocket medical costs.  Many people refer to this as a “cost of living” index but it also includes the cost of funerals!   On Thursday morning, February 20, the BLS reported that the CPI rose 0.1 percent in January from December and 1.6 percent from a year ago.  Please note that the CPI, which is used to adjust many things for inflation such as Social Security benefits and certain types of savings bonds, does include energy. Somehow, the misperception persists that the government excludes gasoline, home heating oil, etc.  I hear that all the time.  When food and energy are excluded, the so-called “core” CPI behaved the same as the “headline” number: up 0.1 percent during the latest month and 1.6 percent ahead of last year.  We economists look at the core because it usually tends to be less volatile than the overall CPI, thereby giving a better view of underlying inflation.  


Europe and Deflation

Screen siren Mae West said, “Too much of a good thing can be wonderful.”  The decline of global inflation from double digits in the late 1970s has been truly wonderful.  However, too little inflation can be a real problem, especially if it morphs into deflation.  (FYI, Mae West was a 1930s movie actress famous for her raunchy quips. You’ll have to google her since I can’t repeat the best ones).   Over the past year, the European CPI has risen only 0.7 percent, which is less than half as fast as the U.S.  There are growing fears that parts of Europe could be on the brink of deflation where overall prices and wages start to fall.  Deflation is usually the result of low economic growth, high unemployment, and overly restrictive monetary and fiscal policies.  Once started, it is very difficult to reverse.  As prices drop, consumers and businesses postpone purchases, making demand even weaker.  Deflation is especially harmful to the financial system as falling incomes make it harder for borrowers to repay loans.  Bank capital is eroded as the value of collateral shrinks.  


What it Means

U.S. inflation is – to the surprise of many – still well under control and as long as economic growth unfolds as expected this year, deflation is a long shot.  This means the Fed will continue its gradual winding down of securities purchase and is in no big hurry to raise short-term interest rates.  Europe, on the other hand, may have to step up its purchases of securities – something the Germans strongly oppose.  Keep your fingers crossed that European growth picks up enough to lower the odds of deflation because if prices start falling, the European Central Bank is likely to be too slow to react.   Interesting thought: the song “Brother, Can You Spare a Dime?” was written in 1932 near the bottom of the Great Depression.  Prices were falling so fast that it could also have been called the “Great Deflation.”  Let’s hope the Europeans can start singing “Happy Days Are Here Again” rather than this mournful tune.

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