The History of Inflation

September 21, 2009

Here is something for all you chart and graphics lovers.

I took the information available from this’s CPI page and made a couple of graphics.

This first one shows the percent change in the yearly CPI beginning in 1920:

History of CPI

What’s really interesting is this line graph, which tracks the CPI in dollar terms (assuming $1.00 at the beginning of 1920):

History of CPI (Chart)

Notice how the CPI really turns up around the mid-70s. That’s the bad thing about compounding. Just as interest on a bank account compounds (growth on top of growth), so does inflation. Couple that with the high inflation rates of the 70s and you can see why the chart took such a drastic turn upward beginning in the 70s. Prior to the 70s, inflation was relatively flat.

9 responses to The History of Inflation

  1. I find it interesting that the beginning of the “roaring 20’s” was on par with the depths of the Great Depression…

  2. I trust the government’s numbers on inflation with a grain of salt (same for GDP and unemployment). There is an outfit called ‘ShadowStats’ that continue to track the CPI based on the formula in use in 1980. Since then the inflation calculations have been manipulated and changed due to political pressure:

    Inflation hitting 9% in 2008 is more likely — gasoline was averaging at $4.11 a gallon in July 2008! That one thing (price of gas) drove prices up on absolutely everything you bought. Just watching the price of Gold in USD should tell you that these government statistics are way off.

  3. I think it would be better to use a logarithmic y-axis instead of a linear one. The rate of increase in inflation can only be analyzed using a logarithmic y-axis since a year over year inflation increase is considered compounding.

  4. The pre-1960’s period is of dubious relevance because its from before we took ourselves off the gold standard. You’d get a better picture of inflation if you just look at the post-gold standard period.

  5. @mike: There was a vicious recession and banking panic in 1920-1921. It doesn’t get much press because it was over in 18 months whereas the Great Depression went on for several years. The difference between the two was Prez Harding cut taxes and expenses. The government let the economy correct on its own. This put capital in the hands of the people who used it to get the economy moving. During the Depression Hoover and FDR got intricately involved in the economy and turned a recession into the Great Depression.

    Beyond that, Alex and BG are correct that the inflation numbers are suspect after 1980 as they have been manipulated, and we were on a gold standard until 1971 so it is hard to tell the true force of inflation since the 80s.

  6. Well, there’s the PPI, and the CPI-U, and then there’s the CPI-“me”, as in my personal inflation rate. I wonder how many folks have calculated their “personal” inflation rate for the basket of goods and services they actually consume. I’ll bet not many.

    Let’s take an example. Some inflation figures eliminate energy and food as “too volatile” for core inflation. Well, that’s great if you don’t drive or eat. And the CPI-U includes rental housing, but not the cost of mortgages, as I understand it. If you have an option-ARM, I guarantee you you’d better be ready for a jolt.

    On the other hand, many retirees have no mortgage, don’t rent (they own free and clear), and are on Medicare. Their Social Security is adjusted by a COLA, and many also have opted for inflation-adjusted annuities to supplement Social Security and other investment income.

    So, my point is just this. Sure, inflation figures are interesting. But the most meaningful inflation number is the one you personally experience. The CPI-“me”. My wife and I have kept a spreadsheet going for over a year now to see how we compare to the official BLS statistics. It’s a work in progress.

  7. The government statistics are quite reliable, the shadowstats website uses some dubious math tricks that, as a economist, I really don’t like.

    Inflation is a very tricky subject. Yes, inflation has been positive and steady since the 1970s. However, we know that expanding economies require an expanding monetary base (or else you get deflation and in many cases that’s worse). So a good chunk of the “inflation” is actually economic growth.

    To put the numbers in perspective, one needs to look at inflation adjusted per capita income:

    You’ll notice that inflation adjust income is growing at the same time inflation is growing. Why are we worried about inflation?

    I like the idea of a CPI-me. Its more realistic.

  8. If you want to know the real price in real US money get the price of junk silver coins and factor backward to the real price. Gasoline is one real US silver quarter. Gasoline hasn’t gone up in sixty years. The currency has collapsed. The Dow, in real silver coins, has not gone up in sixty years. The real Dow is about $850 in silver coins. It’s all just currency debasement, like monopoly, handing out more fake paper money so everyone can play. Owners win. Corporations and governments win. Renters, families with kids, parents, employees all lose in this game. Protect yourself by owning the things you want with no debt. Get a $50,000 a year job, save up $1,000 a month, until $500,000 net worth. Have all you need paid for. Store wealth in gold coins. It’s the only bull market going because gold knows where we are going and it’s not to more fake paper money. The fake money will be defaulted on at a faster and faster rate. It has to. Good luck to us all. This is not the great depression. It’s the great adaptation. We all have to adapt to the brave new world.

  9. To be emotional about inflation sounds like not trusting statistics because it is error prone. And I cant be expected to see money the way a policy maker sees it but I can be expected to understand the difference in attitude between us on the use of money, whether as medium of exchange, store of value or unit of account. The Fed is expected to balance all three, but I am only expected to maximize the one use that I want money for immediately. If I have a lot of the stuff, the store of value supersedes, and if I have a lot of hope and not much else, I d only wish it comes into my hand so I d exchange it for my needs. It dont matter if CPI is 1 or 100%. And policy makers, assuming they represent public interest, must devise a monetary policy (yes inflation is one really) satsifies both needs and still help account where things stand on the national balance sheet without giving one figure today and another next month, just because interpretations of inflation has changed over the period and not the underlying fundamentals for the index.