Two Percent Inflation Is A Lot Worse Than You Think

Even if you were to ignore these issues and take CPI numbers at face value, it is still illuminating to look at the differences in price change in the different industries comprising CPI.

The following are a graph and table measuring percent price change by industry from 1997 to 2017. Overall CPI increased by approximately 43 percent over this period, but industries such as education, childcare, and medical care increased by far more, and industries such as software and TV decreased in nominal price over this period.

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Source: Bureau of Labor Statistics (BLS).

Although yearly CPI growth averaged 2.1 percent over this twenty-year period, college tuition increased at over four times this rate, at 8.5 percent per year. Prices in industries such as childcare and medical care also increased far faster than overall CPI.

What is interesting to note about the industries that saw decreased prices is that they are sectors where either increases in technology have caused huge growth in productivity or where the US has outsourced production to other countries such as China. Not only is inflation decreasing our overall purchasing power in a chronic fashion, but this overall CPI increase exists even despite the issue of substitution bias and the massive price deflation in certain industries. If CPI did not include these massively deflationary industries, we would better see the true harm from inflation.

The industries with large price increases are precisely the industries that have seen less growth in productivity, so they give better insight into the effects of monetary inflation. Education, childcare, and medical care are all well-established, labor-intensive industries, meaning that an increase in capital and technology generally has less of a deflationary effect on the prices of their products. Compare these industries to the relatively new TV industry, where improvements in production are occurring at a rapid pace.

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