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Tuesday, July 17, 2018

The ‘Chart of the Century’ Makes the Rounds at the Federal Reserve

The greater the degree of government involvement in the provision of a good or service the greater the price increases over time.

Over the last 12 years, I’ve probably created and posted more than 3,000 graphics on CD, Twitter, and Facebook including charts/graphs, tables, figures, maps and Venn diagrams. Of all of those graphics, I don’t think any single one has ever gotten more attention, links, re-Tweets, re-posts, and mentions than the one above (and previous versions), which has been referred to as “the Chart of the Century.” Here are some examples from earlier this year for the version of the chart with price data through December 2017.

Just this week, the chart got some fresh attention this week when Bloomberg published an article on Tuesday titled “Chart of Century Gives Powell Gloomy Glimpse of Trade-War World,” with this opening:

A multi-colored graphic that’s made the rounds at the Federal Reserve hints at what Chairman Jerome Powell could face if President Donald Trump succeeds in throwing globalization into reverse: Higher prices for many goods and potentially faster inflation.

Plugged as possibly the chart of the century by economist and originator Mark Perry, it shows that prices of goods subject to foreign competition—think toys and television sets—have tumbled over the past two decades as trade barriers have come down around the world. Prices of so-called non-tradeable—hospital stays and college tuition, to name two—have surged.

That report was followed yesterday with a CBS MoneyWatch article “Inflation risks, trade war costs, make Fed’s job much harder.”

A chart that has been making the rounds at the Fed from economist Mark Perry shows how falling prices for trade-sensitive things like TV sets and toys have helped offset rising costs for things like medical services, housing and education.

Based on yesterday’s BLS report for CPI price data through June, I’ve updated the chart with prices for the first six months of this year. During the period from January 1997 to June 2018, the CPI for All Items increased by 57.4% and the chart displays the relative price increases over that time period for 15 selected consumer goods and services, and for average hourly earnings (wages). Seven of those goods and services have increased more than average inflation, led by hospital services (+216%), college textbooks (+204%) and college tuition (+191%). Average wages have also increased more than average inflation since January 1997, by 84%, indicating an increase in real wages over the last several decades.

The other seven price series have declined since 1997, led by TVs (-97%), toys (-74%), software (-67%) and cell phone service (-52%). The CPI series for new cars, household furnishings (furniture, appliances, window coverings, lamps, dishes, etc.) and clothing have remained relatively flat for the last 20 years while average prices have increased by 57% and wages increased 84%. Various observations that have been made about the huge divergence in price patterns over the last several decades include:

a. The greater (lower) the degree of government involvement in the provision of a good or service the greater (lower) the price increases (decreases) over time, e.g., hospital and medical costs, college tuition, childcare with both large degrees of government funding/regulation and large price increases vs. software, electronics, toys, cars and clothing with both relatively less government funding/regulation and falling prices. As somebody on Twitter commented:

Blue lines = prices subject to free market forces. Red lines = prices subject to regulatory capture by government. Food and drink is debatable either way. Conclusion: remind me why socialism is so great again.

b. Prices for manufactured goods (cars, clothing, appliances, furniture, electronic goods, toys) have experienced large price declines over time relative to overall inflation, wages, and prices for services (education, medical care, and childcare).

c. The greater the degree of international competition for tradeable goods, the greater the decline in prices over time, e.g. toys, clothing, TVs, appliances, furniture, footwear, etc.

I’ll continue to update the price chart every six months, look for the next version in January 2019 with data through December 2018.

Reprinted from AEI

  • Mark J. Perry is a scholar at the American Enterprise Institute and a professor of economics and finance at the University of Michigan’s Flint campus.