Just off the top of my head, here are some “record high prices” I’ve seen articles about in the past year:
In general, inflation seems to be back. Here’s my amateur opinion. Inflation, as Milton Friedman would say, is always a money supply problem. In past inflations, the increase in money supply has been an actual increase in M1 and M2. What this means is that, while inflation wreaks havoc with contractual values and savings, generally people are no worse off on present-day transactions. This is because in the circular flow of money, the new money makes its way into higher wages. So you make five dollars an hour and bread costs a dollar a loaf, and after the inflation you make six dollars an hour and bread costs $1.20. Your savings doesn’t buy as much bread, but your current income does.
Here’s what’s different about this inflation: a lot of the new money in the economy over the past ten years has come from housing appreciation. You buy a house for $200,000 and enter a contractual agreement to pay a mortgage on a $200,000 house. Now, ten years later, your house is “worth” $1,000,000. Your contract is still for a $200,000 mortgage. You’ve gained access to $800,000 that wasn’t there before. You cash it out and spend it. You’ve increased the money supply, which raises prices. But it’s not a general inflation, meaning the money didn’t come into the market through higher wages. So people relying on wages see higher prices with no corresponding rise in wages. Bread is $1.20, but you still only earn five dollars.
Normally the new money would work its way back around to wages, but not if housing values collapse, since the money was only in the market as a result of higher expected resale values. When you go to sell your house for $1,000,000 and end up getting only $700,000 for it, you have $300,000 worth of stuff that was given to your for nothing of value in return. Like an auction with play money, you’ve bid up the price of goods without contributing anything of value to offset the higher price.
Anyway, all this inflation is kind of funny, given Alan Greenspan’s prognosis of steady global deflation in his book The Age of Turbulence. He says rising incomes in developing nations, which have less consumerism and higher savings rates, has increased global investment, leading to lower prices. That works for things like DVD players and cell phones, but not for basic staples such as food, which are seeing an increase in demand as people now make enough money to eat food regularly.
Well, that was just what I thought of while I was driving home from work on Friday. It’s probably not very intelligent. Oh well.