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Inflation is brutal.
The headlines are everywhere. You don’t have to leave the Bangor Daily News to find them. “Inflation is squeezing Maine loggers.” “Jerome Powell assures the Fed’s inflation flight won’t trigger recession.” “Fed unleashes another big rate hike in bid to curb inflation.”
The Federal Reserve is using its tools to try to put the genie back in the bottle. When they raise interest rates, the cost to borrow money increases. This means people borrow less. When they borrow less, less goes into the economy. With less in the economy, growth slows.
When they conduct “open market operations,” they sell their financial assets. Open your wallet and look at your cash. At the very top, it says “Federal Reserve Note.” Those “notes” get returned to the Fed, decreasing the money supply.
But “inflation” — despite the headlines — isn’t one thing. It looks at lots of prices across the economy and is calculated as a formula based on this “basket of goods.”
Yet, like the regular grocery store, you don’t need to take a basket. You can just grab a couple things and be on your way.
That’s the genesis of the “Chart of the Century.”
It breaks “inflation” down into various components. While the chart is prepared by a right-leaning institution, the data comes from the Bureau of Labor Statistics.
What does it show?
If you start on January 1, 2000, the headline inflation rate between then and now is about 75 percent. Median wages have increased about 84 percent in that same period. Theoretical moral of the story? Most Americans are doing better than they were 22 years ago.
But you need to read beyond the headline.
The good news is that many forms of entertainment spending are more affordable, both in terms of nominal dollars and inflation-adjusted ones. Televisions, computer software, cell phone plans, toys — all are cheaper than they were in 2000.
New vehicles and home furnishings are up a little bit from their early 2000 costs, but still far below inflation over that period. Apparel is about a push.
Now for the bad news.
College tuition costs are up around 267 percent since 2000, while child care expenses have more than doubled. Medical care in a hospital is nearly 300 percent more costly.
Colleges and hospitals both suffer from the “third-party payer” problem. Easy, cheap, low-interest money — student loans — means students are less price sensitive in their educational choice. Because students are often deciding between numerous different schools, those institutions will compete on things other than price.
It might be academic or athletic prestige. It could be the swanky new dining hall with a wood-fired pizza oven. Maybe it is the gorgeous gym with an Olympic lap pool and Friday night luaus. Whatever it is, it probably costs money.
Prospective students are willing to spend that money, because their loans are cheap. It is the exact behavior the Federal Reserve encourages when it lowers interest rates. Yet, this creates an arms race, and prices increase 267 percent over 22 years.
Meanwhile, the byzantine health care system — including insurers, the government, and hospitals — means you probably have no idea how much you actually spend to take care of yourself. Inflation becomes pretty easy when no one knows what they are paying.
Solving inflation, in the long run, is going to take more than the Federal Reserve hiking interest rates and doing “open market operations.” It takes consumers making informed choices on what they value. McDonald’s is currently seeing it first hand, with customers deciding chicken nuggets aren’t worth it.
The same holds true elsewhere. It will probably cost a student more to attend Bowdoin than the University of Maine. Is it worth it? If lifestyle changes will decrease your medical costs, are they worth it?
The Federal Reserve can’t make those decisions. If we are going to fight inflation, it is going to take all of us making our own decisions on what is worth it, and what isn’t.
