People play little games with themselves. One I play involves changing prices to 1967 dollars when contemplating a purchase. This is dangerous for my finances.
For example, I see a socket set on sale for $9.99. I already own many sockets, but “$9.99 today is like under $2 when I got out of high school. What a deal, I’ll buy it!”
The danger is letting the fact that tool prices increased less than inflation seduce me into buying something I don’t need. Not everyone reacts the same, however. The next guy looking at the sockets may think “$9.99 for that socket set, what a rip-off! I got the exact same set for $5.99 the summer Junior was born.”
For those who make such comparisons, the following table shows years prices were lower than 2003 by a whole number factor. To convert a dollar amount in year indicated to today’s equivalent, multiply by the factor. To convert a 2003 amount back to your own “golden age,” divide by the factor.
1947 8
1963 6
1969 5
1973 4
1979 3
1981 2
1988 1.5
For example, $50 today buys about as much as $12.25 did in 1947, $10 in 1969, $13.34 in 1979 or $27.67 in 1988. $10 in 1963 would buy what $60 buys today and $10 in 1973 equals $40 today.
Humans are not as rational as economic theorists assume and the irrational psychology of cognition produces reactions that confound Nobel laureates.
Our reactions to price changes often depend on prices or inflation during some important formative period. For me, it is around 1967-1970, the time in which I graduated from high school, held my first job and bought my first car. Irrationally, that is my reference for what money is “really” worth.
When prices or wages are stable over long periods, large cohorts of people view those prices and wages as “normal” or “correct.” Many remember gasoline oscillating around 25.9 cents a gallon for some two decades. They may spend the rest of their lives assuming that is the “right” price for gas and that anything else is “wrong” in some ill-defined but important way.
Long periods of stable incomes increase the psychological trauma of inflation. British navy salaries stayed constant from 1812 to 1918. Jellicoe led the British fleet at Jutland for only 3 pounds per month more than Nelson had earned at Trafalgar 111 years earlier. German wages had been similarly stable. The European inflations from 1915 through 1925 were so distressing because they were so unfamiliar.
Familiarity with inflation has opposite but similarly pervasive effects. Over the periods that U.S. prices rose two, five and eight times, they increased by factors of 72 billion, 4 trillion and 1.1 quadrillion in Brazil. When no one in society remembers stable prices, anti-inflation policies may seem surreal. Count your blessings.
© 2004 Edward Lotterman
Chanarambie Consulting, Inc.