Inflation is often referred to as the silent thief, quietly reducing the value of your savings over time.
The price consumers pay for a basket of goods and services has risen 54% over the past 20 years.
Since 2000, the price of a trip to the hospital has increased by over 200%, while the cost of a new TV has fallen by close to 90%.
THE SILENT THIEF
Humans are quick to recognize radical changes in their day-to-day lives, but small incremental changes often go unnoticed. This is why inflation is often referred to as the silent thief. During periods of low inflation, like the last 20 years, changes in the price consumers pay for goods and services often get overlooked.
The chart below helps visualize the last two decades of incremental price changes in a variety of goods and services (Figure 1). The black horizontal line reflects the 54.3% increase in the Consumer Price Index (CPI) since 2000. CPI measures the cost of an expenditure-weighted basket of goods and services.
Items that have experienced above average inflation are drawn with orange lines. The two areas that have exhibited the sharpest price increases over the past two decades are health care and higher education. The cost of hospital services has increased a whopping 218%!
The average hourly wage, although not a component of CPI, is included on the graph for comparison's sake. Over the last two decades, wages have increased at a slightly faster pace (83%) than headline inflation. The recent wiggle in the line representing wages is in response to the first round of stimulus checks mailed out last spring. Look for stimulus checks to provide an additional boost to wages in the coming months.
Not everything costs more than it did 20 years ago. New cars cost roughly the same amount as they did in 2000. Notably, the cost of wireless service, toys, and televisions have all declined significantly over the past two decades.
It is easy to track the change in the price of a good whose quality does not change over time, like an apple. But how do you compare the price of a 27-inch rear-projection TV from 2000 that cost $500 to that of a 50-inch LED TV that costs $300 today?
Economists apply a technique known as a hedonic adjustment to account for changing product quality. It is a complicated process, but in essence, a television’s characteristics (screen size, quality, picture-in-picture) are assigned a value based on their utility. Economists can then adjust prices when the quality of a good changes.
Television prices have decreased significantly since 2000 and at the same time become much more feature-rich. This combination explains the 90% decline in television prices shown in the chart.
COST OF HIGHER EDUCATION
One of the most interesting inflation trends is the cost of a college degree.
Tuition and fees are up 170% since 2000 (Figure 1), vastly outpacing the rise in headline inflation. However, the 0.8% annual increase in 2020 was the smallest in 40 years (Figure 2). Thanks to the pandemic and heightened competition from online sources, it appears that air is starting to come out of the higher education bubble.
While the pace of tuition increases has slowed, it is unlikely that you will see colleges decreasing tuition prices anytime soon. With the costs associated with a four-year degree remaining elevated, education planning remains an important component of a family’s overall financial plan.
This month Allegiant is focusing on the topic of education planning, with articles on Navigating Education Planning in 2021 and Florida Pre-Paid vs. 529 plans.
INFLATION AND YOUR PORTFOLIO
As the economy reopens this summer and the latest round of stimulus checks get spent, we anticipate a spike in inflation. The big question is how long will it last? Our expectations are that it will prove to be transitory. As bottlenecks in the global supply chain ease and inventories are replenished, look for inflationary pressures to return to normal levels.
However, there is a risk that the global supply chain remains constrained beyond this year. Persistently high inflation would weigh heavily on the price of long-term bonds. This downside risk combined with their historically low yields is why Allegiant has made the conscious decision to underweight long-term bonds in client’s portfolios.
“Inflation is when you pay fifteen dollars for the ten-dollar haircut you used to get for five dollars when you had hair.” - Sam Ewing, American Writer & Humorist
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