Inflation. The Federal Reserve has been trying to generate inflation for much of the past decade. Inflation, as measured by the Consumer Price Index (commonly referred to as CPI), is up 55% over the last 20 years. While that sounds like a high number, overall inflation has been pretty low. 55% equates to an average inflation rate of 2.2% per year.
What's interesting is looking at the actual distribution of inflation. You can look at the specific categories of goods and services versus the overall CPI number, and there's a huge disparity within the numbers.
The highest inflation during the last 20 years has been Textbooks which have had an inflation rate of an incredible 207% and College Tuition which has increased 197%. In the textbook industry, the industry has pretty much had a monopoly. You're given a book and you don't have much of a choice but to get the book. It will be interesting to see over time if this trend changes as more content continues to be pushed electronically.
Demographics have played a huge role in the increase in college tuition. There's been a huge imbalance in demand and supply and schools have had to add more professors, but many schools have also chosen to raise tuition prices at a pretty fast pace.
No surprise medical care inflation has been 105%.
On the flip side, there are many categories that have had negative CPI.
- Household furnishings and clothing are -2.4% and -4.8%.
- Wireless service -45%, software -66%, toys -67%, and TVs -96%.
- Technology prices have benefited from two key factors - the technology adoption lifecycle and manufacturing economies of scale.
Bottom line: as new products enter the mass market, they moved down the unit cost scale. The first flat screen television was more than $10,000 plus, versions that are good or better now cost $500.
While some prices are indeed up, until there is a sustained increase in wage inflation, inflation as a whole may very well remain below the Fed's 2% target level.
What is most important are the specific components of inflation in your own household. If much of your budget is dedicated to education and healthcare expenses, this can have a dramatic impact on your finances.
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