The Dow Jones Average closed at an historic high yesterday…maybe.
Yes, 14,253.77 was higher than ever. However, if we remember inflation, then the most recent Dow high was during 2000.
Let’s start with the numbers we are used to hearing. At 14,253.77, the Dow surpassed its most recent peak in 2007. Even more happily, that measure of the Dow indicates a 22% increase since 2000.
But is the Dow really soaring?
Using 1994 inflation adjusted dollars shown by the black line, the last Dow high was really January 14, 2000. If we stick with the nominal numbers that we hear daily, then the Dow has to touch 16,052.22 to really hit its historic peak. Alternatively, again with those 1994 prices, we could say that the Dow’s high, 13 years ago, was 10,424.28. That means the current Dow would be 9256.38.
Why care? If your portfolio increases by 10% and prices increase by 10%, then your purchasing power has gone nowhere. On the other hand, under the mattress would have been much worse.
Sources and Resources: I especially liked and used for this post a WSJ.com article with the ideal discussion of inflation and the Dow but it is gated. Easily accessible, this Planet Money blog discusses inflation and also points out Dow index problems.
How to measure inflation?
The Christmas Price Index.
Whereas the BLS (Bureau of Labor Statistics) Consumer Price Index includes food and medical care and cars, PNC Wealth Management’s CPI, its Christmas Price Index, has swans and hens and dancing maids. This year, the PNC market basket, filled with the 364 gifts in ”The 12 Days of Christmas,” would cost you $107,300 while last year, the total was $101,119.84. Its 6.1% increase far exceeds the 1.8% CPI change from November 2011 to November 2012.
Prices that remained the same:
- the partridge
- turtle doves
- calling birds
- milking maids
- dancing ladies
- leaping lords
Prices that increased:
- pear tree
- French hens
- gold rings
- piping pipers
We could hypothesize that an unchanged $7.25 minmum wage kept most of the labor expense steady while soaring commodity prices for corn and other bird feed pushed up the price of the hens.
Our bottom line: The inflation rate depends on what you place in your market basket.
A final fact: Called the rule of 70, you can calculate how long it will take a certain statistic to double by dividing 70 by the growth rate of that variable. For example, if the growth rate of prices is 2%, just divide 70 by 2 to see that prices will double in 35 years.
Sources and Resources: At the PNC Christmas Price Index site, you can participate in an interactive animation of the index and check out how it has fluctuated during the past 29 years. For a good summary of this year’s data, I suggest USA Today while to see the US CPI, you can go to BLS data, here. Also, Econlife has looked at the PNC index for 2 years, here and here.
Inflation is not only at the cash register.
Our story starts at H&M where an Esquire journalist tried on a size 36 pants that were too tight. He continued his search for pants with the 36″ waist label at Old Navy and they were too loose. After that, he sampled a pair of Dockers. Curious, this gentleman did the math. The H&M pants had a 37″ waist, Old Navy, 41″ and Dockers, 39.5″.
Women also have experienced some “downsizing.” Graphing size changes in the UK, The Economist concluded that women’s sizes have plunged by 2 numbers. If you wore a size 14 several years ago, now it is labeled a 10. If you wore a 4 or a 6, your size might have declined to a double zero.
Size inflation–the trend toward smaller sizes getting larger—has its pros and cons. While smaller sizes make us feel good and might elevate retail sales, they enable us to ignore weight gain.
The bottom line: Price inflation also has pros and cons. Saying that inflationary policy helps borrowers, lowers unemployment, and makes holding cash less attractive, Paul Krugman supports expansionary Fed policy. By contrast, a more traditional view suggests that inflation is a hidden tax that distorts price signals, punishes savers, and creates a less stable business environment.
So, whether we are at the clothing rack or the cash register, we should think about inflation.
Here is the journalist who looked for the size 36″ waist, an Economist chart of size inflation, a Bloomberg columnist worrying about inflation and Paul Krugman asking for more. The CPI data is here.
You might want to check the CPI (the Christmas Price Index). Calculated by PNC for the last 28 years, it tells us the value of the items in “The 12 Days of Christmas.”
This year, the PNC CPI totaled $24,263.18 for anyone purchasing one set of each item. Repeating each item as the song suggests brings cumulative spending (364 gifts) to $101,119.84. At the PNC CPI site, you can see a whimsical interactive animation of the index and check out how the index has fluctuated since it began.
Here is last year’s econlife look at the index.
The Economic Lesson
This year, the annual increase for the song’s gifts, 3.5% was the same as the change in the CPI, end of October 2010-end of October 2011.
Looking specifically at the Christmas Index, we would see that prices varied. The ladies and maids prices were stable while the 7 swans-a-swimming at $6300, were 12.5% more than last year. (Petsmart was one source of PNC’s prices.)
An Economic Question: You can calculate how long it will take a certain statistic to double by dividing 70 by that number. For example, if the inflation rate is 3.5%, how long will it take prices to double? (You can see why economists target an inflation rate that is closer to 2%.)