What’s Driving Inflation?

One of the basic concepts in economics is that things get more expensive over time. But there is a lot of nuance in such a simple idea. Not everything goes up by the same amount, and in fact not everything goes up.

As you can see in the table below, Televisions, toys and furniture have all gotten less expensive over the last 20 plus years. What makes the cost of some items go up while others go down?

This idea, among others was explored in a new piece by “Jesse Livermore”, called Upside-Down Markets. In it he said:

Industries that aren’t able to appreciably increase their productivity tend to experience above-trend inflation. They rely on a labor supply whose cost is increasing faster than inflation, but they aren’t able to use that supply any more efficiently to generate output, so they have to pass the cost on to consumers, raising prices at a pace that exceeds inflation as well.

One of the areas that has increased prices faster than the overall economy is colleges, which Livermore says:

Are in the business of selling a prestigious credential, and one of the determinants of the prestigiousness of the credential is a low student-to-teacher ratio. In 1998, it took one professor to teach a college course at a specified student-to-teacher ratio. Today, it takes that same number, by definition.

On the other end of the spectrum are things like sporting goods and televisions, which has seen prices fall due to globalization. Livermore says:

Durable goods industries such as clothing, toy, furniture, and electronic manufacturing are more able to arbitrage differences in international labor costs than services industries such as child care that can’t offshore their production as easily. As a consequence, durable goods industries have experienced less inflation, if not outright deflation.

As we’ve seen over the past decade, inflation is one of the least understood concepts in all of economics. We can’t predict it, can’t control it, and don’t even know for sure where it comes from. Thanks to this brilliant post, I know a little more about this topic than I did yesterday.

Source:

Upside Down Markets: Profits, Inflation and Equity Valuation in Fiscal Policy Regimes