"Now's The Time To Fall In Love" is a song from the Depression era written by Tin Pan Alley tunesmiths, ... Potatoes are cheaper. Tomatoes are cheaper. Now's ...
Since 1995, durable goods (cars, televisions, computers and the like) have been getting cheaper in the U.S. That's even as the prices of services and nondurables have mostly kept rising.
In the chart above, prices are viewed using 2009 as the base year. Here's a chart using 1960 as the base instead:
Finally, here's the same data as a series of year-over-year percentage changes, which is how we usually talk about inflation or deflation:
The way information is presented really shapes how we understand it, no?
The bottom chart tells a story many of us are familiar with: the Great Disinflation. The overall inflation rate rose seemingly unstoppably from the mid-1960s through 1980, then encountered the immovable object that was Paul Volcker. Ever since, the rate of inflation has been falling. Similar stories have unfolded in other developed countries, and tighter monetary policy is generally seen as having played the leading role. The lack of a major global oil-supply crisis since the early 1980s -- those two big spikes in nondurable-goods inflation in 1973-1974 and 1979-1980 were all about oil -- obviously hasn't hurt, either.
Looking at the top two charts, though, I see a couple other stories begging to be told:
The story behind the great durable-goods deflation (which started in the second quarter of 1995).
The story behind the persistence of inflation in services. The third chart shows that the pace of increase slowed after 2008. But service prices have continued to rise.
The great durable-goods deflation is what I'll focus on today. It does not appear to be driven by central banks and their ability to create and destroy money. "Inflation is always and everywhere a monetary phenomenon," Milton Friedman wrote, and that presumably means that deflation is always and everywhere a monetary phenomenon, too. But monetary forces sweeping across the whole economy don't explain why durable-goods prices would follow such a different trajectory than other prices. So what does explain it?
One explanation is that goods (both durable and nondurable) are tradeable while services generally are not. That is, unlike most services, goods are bought and sold across national borders. So the rise of China as a giant new low-cost producer of manufactured goods in the 1990s and 2000s put lots of downward pressure on durable-goods prices, but not so much on nondurable goods (the three main categories of nondurables are food, energy and clothing, and China is a big exporter of only the third) and none at all on services.
The other explanation is that manufacturers of durable goods keep getting better at making them. The economics term for this ismultifactor productivity growth, and it's been much higher for the past few decades in durable-goods manufacturing than in nondurable-goods manufacturing. Productivity growth in services is harder to measure, but seems to have been lower than in manufacturing (although there's some argument about that).
It's not just that durable-goods manufacturers have gotten more efficient in making things. It's also that they churn out products that are often vastly superior to those of the past, most notably computers and other electronic devices. Government inflation measures in the U.S. incorporate "hedonic quality adjustments" to try to reflect such improvements. These adjustments are oftencriticizedby skeptics as a manipulation of the inflation rate, but they can't really be avoided. Yes, an iPhone costs a lot more than a Princess telephone did 25 years ago, but it is capable of exponentially more. And a low-end Android phone that does almost as much as an iPhone costs less than a Princess does now!
Technological progress (the driving force behind multifactor productivity growth, and also of the huge gains in living standards over the past two centuries) is a wonderful reason for persistent durable-goods deflation. Global competition isn't bad either. Brian Barnier, the consultant and economic-data maven who gave me the initial idea for this column, sees goods deflation as a cause for economic optimism.
But the monetary arguments of Friedman, his intellectual forebear Irving Fisher and many economists since have convinced central bankers that economy-wide deflation is a really bad thing. It makes it much harder for individuals and businesses to repay their debts, the reasoning goes, which can suck the economy into a downward spiral. With durable-goods prices falling and falling, the Federal Reserve has thus been forced to keep monetary policy loose enough that other prices go up. That has to be at least part of the story behind the persistence of inflation in services.
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