Why Inflation Feels High

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Here is an interesting chart of price changes from 1997 to 2017 for various good and services as measured by the BLS (which tracks CPI and inflation). The Carpe Diem blog author argues that the stuff that got more expensive was heavily regulated by the government, while the stuff that got cheaper was subject to free market forces. I don’t agree completely with that explanation.

My reaction: The red lines were purchases that were quite hard to avoid (medical costs, childcare, education), while the blue lines were mostly optional consumer items. I buy cars, household furnishings, TVs, and (sadly for you fashionable folks) replacement clothes only about once a decade. I can put off buying a new car or TV, but I can’t put off my childcare bill.


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  1. hi Jonathan, this maybe outside of the topic, but may be relevant to your readers

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  2. possibly…. but we wont know unless those govt regulated things are tested by free-market forces.
    you cant put off your childcare bill but maybe that bill may reduce because of free-market competition.
    after all childcare is a service and subject to demand-supply like anything else in economics

    • Nonsense.

      Since when did the government regulate college tuition?
      Or much of healthcare until a few years ago? Healthcare expenses went up for everyone except those on government provided plans.

      College textbooks? Please.

      • Your points are valid about college textbooks and tuition. Perhaps government-backed student loans have contributed some, but there are other factors mostly at play there.

        Health care, though, has been heavily controlled by legislation since way before the ACA. Every state has long had a ton of regulations about what exactly must be provided, and nationally wartime income caps and subsequent tax laws have shaped much of the health system in the US.

        Government health care expenses have gone up a lot too, but that is of course hidden from the beneficiaries. And of course government programs have the luxury of pushing expenses off into the private sector to some extent.

        I’m not saying one solution for our health care system issues wouldn’t be a form of government-administrated single payer (as I assume you’d be a fan of), just pointing out that the health system hardly developed free of massive government constraints.

      • Haha so demand-supply economics is nonsense to you.. so explain us your theories o exhalted wise one!

        Or are you one of those hippies who shoot from the hip without much substance ? Or maybe conspiracy theories ?

        Healthcare has always had a huge dollop of government intervention.

        • Alex Coward says

          Ad hominem. Nice. I’ll reciprocate.

          You should look up demand inelasticity. You might learn something. You might even begin to understand the topic posted here and Jonathan’s interpretation, as it flew right over your head.

          Healthcare has no more government intervention than automobiles. Mandatory seatbelts, air bags, safety standards, efficiency standards, DOT certification of tires, lights, driver licensing, inspections in some states. The list is practically endless.

          This ‘muh, bad government’ argument doesn’t have a leg to stand on. Theoretically or empirically.

          • Ad hominem… So you do understand the term ? Good, so I am at least getting your understanding of the English language at the right level.

            Demand in-elasticity doesn’t imply equivalence. “Healthcare has no more government intervention than automobiles” Completely bogus argument. That comment has the intelligence of the gun-owner argument of knives and guns being equal since both can kill disregarding the fact that they differ in the degree of lethality.

            To say that healthcare and automobile industry both have EQUAL constraints from the government is a fallacious and unsubstantiated argument from your side.

        • Price of drugs is not regulated in the US and we all know the exorbitant price of drugs! So where does demand and supply fits in this case?!

    • Or childcare for that matter. How is childcare more regulated that automobiles exactly?

  3. Any chance you’d want to contrast this chart with the one from this article about William Baumol? I found a link to it in the comments on the AEI blog post.


    They both claim the same source, but some of the lines don’t seem to match up. I’d also be interested to hear your thoughts on the different explanations for the trends.

  4. All the blue lines relate to goods that have increasingly been produced outside of the US (cheap labor), that’s why the cost has gone down. What if these goods were all produced in the US instead?! I doubt we would have seen the same trend. Services that are provided in the US are labor intensive and therefore cost has gone up.

    • That’s a good observation, and represents a factor that probably contributes.

      I’m not sure textbooks are produced in the US more than software though (for instance). And “cell phone service” is domestically provided. US housing is also obviously only made in the US, and that appears to have stayed right in the middle.

      Plus there are enormous disparities among the various blue products that have a significant international component to their production, as well as among the red sources. It seems evident that while affordable foreign labor being increasingly taken advantage of might be a significant contributor, it’s far from the whole story.

    • That’s a factor although it’s too simplistic to call it that way. A large percentage of tvs for example are made in Japan or South Korea where wages can hardly be called cheap labor.

      • I just checked my Panasonic TV (made in Mexico) and my 2 Sony cell phones (made in China). Not sure I buy your argument.

      • Yeah, and for high tech stuff like TVs, cell phones and software it is more technology improvements that drive the prices down, not changes in labor costs.

  5. Looking at that list, personally I don’t feel or see health care or child care or college expenses. My health care out of pocket costs haven’t been going up noticably (employer pays the insurance) and I don’t have kids in childcare or college.
    Everything else on that list is either at the overall inflation rate or below. 55% increase in 20 years is only 2.2% annual. Thats not bad at all. So my costs (shown in the chart) are at 2% or below annually for decades.
    Of course thats just my own perception. Someone footing the bill for individual health insurance with 2 kids in childcare and then college in that period would feel the sting of those prices increasing.

    Housing, food and transportation are the top 3 expenditures for households and those 3 items are at or below the 2% rate.

  6. Does annual tax deduction factor into any of this?

  7. I don’t think any of the options presented here fully explain the cause of high inflation in these areas. It’s not simply a matter of necessity (hard to avoid) purchases experiencing high inflation. Food is a primary example of that. Little is more of a necessity than that for basic survival, yet it’s on par with the average inflation rate.

    From studying I’ve done, I’ve reached the conclusion that there is one common thread in these high inflation areas. In every area there exists a disconnect between the person paying for the good/service and the person receiving the good/service. Why does this matter? Because this disconnect greatly reduces the price pressure on those goods/services. When you’re no longer fully footing the bill for a purchase, you have less/little incentive to care about the price of said purchase and will focus far more on other factors. This allows the providers of those services to raise their prices and capture additional profit without hurting their sales adversely.

    In the college arena, this manifests itself in multiple forms: government subsidies as well as parents paying the way for their kids. If someone’s college is going to be partially/fully covered, they tend to care far less about choosing a cost effective school. In healthcare, it too manifests itself in multiple forms: insurance plans that hide many of the true costs of goods/services from the receiver of them by having low co-pays and deductibles, and again government subsidized healthcare plans that also tend to hide costs due to very weak cost sharing features. Need more proof? Take a look at health cost inflation in weakly-insured areas like dental and vision as well as pet medical services. Surprisingly, cost inflation has been very low in these areas even though they really shouldn’t be any different than overall healthcare in theory. The difference is because these are still largely paid out of pocket and more of the insurance plans feature heavy cost sharing elements. This succeeds in maintaining downward price pressure on these services. Another fun fact: healthcare cost inflation was very tame until relatively recently in US history. It wasn’t until out of pocket payments and government subsidized healthcare took off in the 1950’s that inflation started shooting to the moon.

    • simplesimon says

      I came to a similar conclusion that insurance and availability of credit create price distortions. Mix in lack of price sensitivity and you get runaway costs.

  8. Correction: I left out a key word in the above post:
    “It wasn’t until out of pocket payments -FELL- and government subsidized healthcare took off in the 1950’s that inflation started shooting to the moon.”

  9. “In every area there exists a disconnect between the person paying for the good/service and the person receiving the good/service. ”

    Childcare and college text books have no such disconnect.
    Parents pay / receive the childcare service. Students directly pay for books and receive the good.

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