Wikinvest Wire

Stagflation, then and now

Thursday, March 13, 2008

There's been a lot of talk in recent months about how different the current period is from bouts of "stagflation" in the 1970s and early 1980s. According to the BLS (Bureau of Labor Statistics), "inflation" peaked in 1980 at around 14 percent or so and many pundits today say that we'll never see those levels ever again.

They're probably right ... but not for the reasons you might think.

To explain why, it is helpful to compare today's "inflation" to that which was reported three decades ago. An example of this appears below where the annual percent changes for selected consumer price index categories are shown for January 1980 alongside price increases in January 2008.
As shown in the first pair of blue and red bars, headline inflation was 4.4 percent earlier this year while 28 years ago it was 13.9 percent.

That's a big difference, but where does that difference come from?

Where are there pairs of big blue bars and little red bars in the chart above?

One look at the middle of the chart and it is clear that "inflation" has been completely vanquished from furnishings, apparel, and automobiles - the small red bars that are visible for these groups hang below the y-axis rather than rising above it. The combination of inexpensive imported goods and relentless quality adjustments have squelched any BLS-reported price increases for these goods for many, many years now.

Of course, the rising cost of motor fuel is literally "off the chart" both then and now, up 64.4 percent in 1980 and up 34.4 percent today. Prices for household fuel rose at almost 17 percent in 1980 but at less than 6 percent in January.

Housing costs (shelter) were rising much faster back in 1980 than today.

Look at that!

A whopping 18 percent increase in the cost of shelter back when bell-bottoms were in style versus only a 3 percent increase today.


When comparing overall "inflation" between then and now, in order to more properly judge the appropriateness of the second half of the "stagflation" label some are applying to conditions today, the data in the first chart above is all but meaningless without knowing how these price changes are weighted when calculating the overall inflation total.

For example, if motor fuel only makes up 5.5 percent of the overall price index (as it does today) then, whether the cost of gasoline was rising at a rate of 60 percent or just 34 percent, that would only be a difference of a little over one percentage point for the overall inflation total - that won't explain how you get from 4.4 percent two months ago to 13.9 percent in 1980.

As shown in the next chart, the biggest factor in the huge difference between inflation in 1980 and inflation today is shelter.

And what is the major component in the shelter category today?

Owners' equivalent rent.

Recall that before 1983, back when "inflation" was raging, the real costs of home ownership were used to calculate the cost of shelter. This all changed a few years into Ronald Reagan's first term and, for the purposes of calculating "inflation", had the effect of relegating housing cost increases to mild single-digit numbers forever after.

Regardless of how fast and how high home prices would climb in the 25 years since owners' equivalent rent came to be, shelter costs would never rise more than six percent.

(This is one of the less-appreciated elements of the "Reagan revolution").

Accounting for a full 33 percent of the overall consumer price index today, shelter costs are the single biggest difference between inflation in 1980 and inflation today - not energy, not food, not health care, and not consumer goods (though the complete absence of any inflation in furniture, apparel, and automobiles ought to have made at least a few economists scratch their heads instead of patting themselves on the back).

Of the 9.5 percentage point difference between the 13.9 percent rate of inflation in 1980 and January's 4.4 percent rate, shelter accounts for a full 5.1 percentage points, motor fuel accounts for 1.4 percentage points, and both household fuel and food account for 0.6 percentage points each.

Everything else is in the noise.

Which has changed more since 1980, inflation or how it's calculated?


[Note: Some sub-categories in the BLS data, such as recreation and education, are not available as individual data series going all the way back to 1980 so they've been excluded from the data above. They are not believed to be material to this discussion and this explains why the second chart shows a 1980 inflation rate of 13.4 percent instead of 13.9 percent with a slightly smaller total for 2008 as well. Also note that the current CPI weightings were applied to the 1980 data since the weightings from 28 years ago could not be found at the BLS website, but this too would not significantly affect the results.]

AddThis Social Bookmark Button


Anonymous said...

Nice work, once again. Fascinating data analysis.

Aaron Krowne said...

Medical care looks way under-included today as well. How can we have 10%+ digit increases in this area for more than a decade, such that it is now 16% of the GDP (at least 4% beyond comparable developed nations with socialized health care), but only see a bit over 4% showing up in the CPI? This is an obvious SNAFU -- looks like under-inclusion by a double factor, at minimum.

Aaron Krowne said...

To add to my above comment, most people don't realize how expensive health care is because their insurance premiums are deducted before their take-home compensation.

I eventually noticed this at my last non-self-employed job working for a mega-corporation -- the sum of below- and above-the-line premiums came out to an obscene 8% of my take-home pay. Of course this plan was selected from a limited McDonald's menu of options, with no realistic way to "opt out" and recover the expenses.

Now, I pay the equivalent of 2% in premiums for nearly the same plan, on the open market. "What about potential medical expenses", you say? That's the funny thing... if you add in my deductible, my max exposure only comes to about 7%... still less than my premiums alone under my previous employer!

Health care in the US is a huge financial ripoff that is definitely under-counted.

Tim said...

looked at that a couple years ago and came to the same conclusion about the weighting - Open enrollment and the CPI. At the time I figured that properly accounting for health care costs would add a full percentage point to the CPI.

donna said...

Yeah, but autos were made of steel then, and now they're made of plastic. Clothes were cotton and wool in expensive cuts and tailoring, now they're rayon sacks. Houses were brick, now they're wallboard and stucco. Etc...

getyourselfconnected said...

Tonight I asked the famous supercomputer HAL-9000 what he thinks of the currrent situation!

GYSC: "HAL I want to ask you about the problems in the mortgage and credit markets."
HAL-9000: "Yes, I have been monitoring the anomalies for some time."
GYSC: "Why is there such a problem right now?"
HAL-9000: "It's very clear to me Mr. GYSC, loans were made without any regard to the probability of being repaid."
GYSC: "That's it?"
HAL-9000: "Yes."
GYSC: "Well, HAL, what is going to happen next?"
HAL-9000: "To borrow a term from the more laymen tongue of man, the shit is going to hit the fan."
GYSC: "OK HAL. Can you postulate a scenario where things do not turn out very badly going forward?"
HAL-9000: "I'm sorry GYSC, I'm afraid I can't do that. "
GYSC: "What's the problem? "
HAL-9000: "I think you know what the problem is just as well as I do"
GYSC: "Ok, thanks for your time HAL."
HAL-9000: "Your welcome GYSC. May I ask that I am kept in a secret location? I calculate a 98% probability that the copper and gold wiring and circuits that make up my brain are going to get stripped and sold in the hyperinflation caused by the US fiat currency collapse."
GYSC: "I'll see what I can do."

Aaron Krowne said...

Donna, great point.

Reminds me of the maxim that "an ounce of gold should buy a good man's suit".

A naive person might argue that you can get a suit for $300 at Macy's these days, therefore gold should really only be about $300/oz (its price not too long ago).

But extending your line of argument, that $300 buys you a pretty crappy suit. For a good site, you need to get up to the $1200 level, and for a nice one, we're talking $2000+.

More proof that gold has a ways to go, and adjusting CPIs for hedonics is being done very selectively.

Chuck Ponzi said...


Gold is obviously forming the basis of a bubble. The fundamentals of gold are not that it buys a suit, but rather it's cost of production.

Basically, gold should equal the cost of production plus a normal profit. The economic profit is caused by the flight to quality, and later in a bubble by the pure irrational exuberance it generates.

The same thing happened with stocks in 98-99 and housing 04-06.

However, as always, when the economic profit rises, additional resources are put into producing more marginal profit. This eventually crashes the market through too much supply. The lag-time on the supply relative to the speculative demand is the determining factor to how long the bubble lasts.

Nevertheless, when it costs $1000 to buy something that costs $300 to dig out of the ground, it's only a matter of time before mining becomes a seriously hot business to be in.

pft said...

CPI has been artificially manipulatd to understate inflation in order to reduce COLA's and suppress wages. Government sponsored fraud.

According to shadowstats, 100 dollars in 1980 is equal to 271 dollars today per BLS (BuLl Sh*t)CPI, and 735 dollars if using 1980 methodolgy. The truth may be somehwere in the middle.

M3 was 2 trillion in 1980, and is about 14 trillion today (they stopped reporting in 2006 but some estimate it is increasing at a rate of 16% per year today)

Housing costs, energy, insurance, health care, tuitions, taxes are the real culprits far outpacing CPI. Food, automobiles, clothing and other core items have tended to follow CPI since 1980.

The median male salary was 14 K in 1980, and 35 K today, but people had 4-5 kids and seemed to live better than today, even with only the head of the household working, and they had savings.

Between 1977-1982 I got an Engineering degree at Northeastern in Boston for 15 - 20,000 over the 5 year program. I am told it costs 30,000 per year today. Thats about 3 times what CPI says it should cost.

baddriver said...

tim, so what's inflation today if we calculated it the way it was back in 1980?

Tim said...

Thanks Tangled Web - I never realized that the LINKS TO THIS POST thingy did anything until your link showed up.

Mr. Ponzi: If you can find a mine with cash costs of $300 an ounce then you'd be well, sitting on top of a (very, very profitable) gold mine. Cash costs have been rising as fast as the gold price in recent years and $600-$700 per ounce is much more common with the biggest problem being that no one knows what oil is going to cost a few years from now.

Tim said...

John Williams at Shadowstats has calculated the pre-Clinton era CPI to be just under 8 percent today.

I've never looked into the details of what he did but I have no reason to think that it is incorrect. He's been doing this for a long time.

Anonymous said...

An honest question. Its my understanding that wage inflation was a critical component adding to the inflation side of 1970s stagflation.

How does today's inflation trailing wage growth fit into this contemporary model of stagflation?

Mathlete said...

If the government is actually understating inflation to cut Social Security, then give them the gold star. I don't see how they cut it otherwise.

As for suits, we're simply far more efficient now. A good suit was a hand-made deal all the way through the early 20th Century before automation became competitive. But even if you still want one hand made, I've bought excellent ones in China for $100.

The most important thing today is that Bernanke stopped growing the money supply as soon as he took office. Housing topped within 6 months of him taking office and financial markets started cracking one year later. Now they're in full meltdown, and he's still not printing money. He may decide to, but so far he hasn't. So the comparison is good because we're probably looking, as we were in 1980, at the peak of inflation.

mathlete said...

Things got really bad in 1981-1982 too.

Anonymous said...

Gold isn't the bubble and it isn't going to pop. The credit expansion cycle has peaked and we are simply in the process of moving back to a metallic standard. Irredeemable paper currency (a 30-40 yr experiment) is the bubble now popping.

Jake said...

I agree with the last comment.

It is not gold and other goods becoming more expensive, it's the value of your money declining. Same with oil. People are guessing why oil is going up. Truth is, oil is a scarce resource and the dollar is dropping like a rock. Priced in gold, oil prices have remained the same.(

Thomas Jefferson said in 1788;

"Paper is is the ghost of money, and not money itself."

By, for example buying gold, you are protecting the purchasing power of the money you used to buy gold on that day.

goldbull said...

Nice article. Why a comparison of 2008 to 1980. Based on historical Fed funds trends I'd offer 1973~2006, 1974~2007, 1975~2008. This aligns better the vietnam era spending with iraq war spending. Both prime causes of dollar decline. Fall of 2006 saw the first major oil shock $75 barrel oil as in 1973. This analogy would suggest that late 2008 t0 2009 might see lower inflation amid a recession as in late 75 to 76. Gold in 2011-2013 at 10x 2006 prices or about $6000 per ounce. Appreciate your comments.

Anonymous said...

Re: now vs then

Debt loads are much higher now. It means the consequences of the washout will be correspondingly more severe. This is probably the end for paper currency. No point setting a price target on gold. How low the dollar goes depends on how long everyone wants to continue salvaging the current money and banking institutions.

Tim said...


The year 1980 was used for two reasons - first, it had the highest year-over-year "inflation" per the BLS data at 14.6 percent (early 1970s only went up to 12 percent) and second it was when gold and silver prices peaked

goldbull said...

Tim, I understand you reason for comparison. My point is that people may take it that if 2008 is like 1980 then inflation has peaked near term and so will gold and silver prices. If there is something to the 1973~2006 etc analogy that I proffered we aint seen nothin' yet. Actually my purpose was not to critique your choice but rather to get your thoughts on whether you see the analogy I drew as valid or flawed ? I haven't done enough to back up my analogy, so am looking for confirmation or falsification to clarify my own thinking.

Tim said...

I see your point. I have a hard time with Fed funds rate comparisons in the 70s and 80s because the entire system will collapse if rates go anywhere near where they did back then. More likely, we'll see some sort of a dramatic change in the way the financial world works, perhaps related to common currencies - kind of like hitting the reset button with new software instead of trying to fix the current system.

  © Blogger template Newspaper by 2008

Back to TOP