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Tags: inflation | costs | price

The Real (Cost) Inflation

(Dreamstime.com)

Wednesday, 27 October 2021 12:04 PM EDT

Inflation is always painful for the consumers. Even a relatively low inflation such as 4% does not sound real when you go to the store and look at the price tag.

The advertised price never sounds only 4% higher. Your perception and memory of past prices is correct. What you see is what I call ''cost inflation,'' and is the cumulative result of prior years of inflation.

Let me explain: Assume you go buy a tea kettle for \$100. The following year, an inflation rate of 5% is announced.

Looking at the store, you find a price tag of \$105 on your kettle. Fair enough.

Assuming the following year has 4% inflation. Now the price tag reads \$109.20.

In the third year, the inflation creeps up to 5%. Now the price tag reads \$114.66.

So, even with an average inflation of 4.7%, after three years the cost of the kettle increased by 14.6%.

This is cost inflation.

In the years between 1998 and 2008, with higher inflation years, the cost inflation crept up to 30%, even though the maximum yearly inflation during this period only was 3.7%.

Even in the benign years from 2010 to 2020, when the average inflation then was down to 1.9%, the accumulated cost inflation at the end of 2020 reached 19%.

Why is that happening? It is because inflation rates accumulate. Here you have inflation on top of inflation.

For the mathematically inclined of my readers, here is a way where you find the cost inflation (CI):

CI = average yearly inflation x number of years. Here is an example from above data: 4.7 x 3 = 14.1%.

The fiendish way of the growth of cost inflation is that it creeps up silently.

However, there is one other way to find out what CI is: that is to compare published numbers from the consumer price index.

Here you find that between the periods from 1998 to 2008 the value of the U.S. dollar in terms of buying power changed from 1.32 dollars to 1 dollar (this agrees with my above figures of 30%).

It is this accumulated effect of yearly inflation, which really is the culprit or our change in living standard.

As to the current inflation rates, I disagree with Jerome Powell, chairman of the Federal Reserve — inflation is not temporary.

It will persist and grow as long as there is a gap between money supply for consumption and insufficient production of goods due to still low employment numbers.

Dr. Hans Baumann, a former Corporate Vice President and founder of his company, is a well known inventor, economist, and author having published books on scientific, economic, and historical subjects. Read Dr. Hans Baumann's Reports — More Here.

HansBaumann
It is this accumulated effect of yearly inflation, which really is the culprit or our change in living standard.
inflation, costs, price
453
2021-04-27
Wednesday, 27 October 2021 12:04 PM
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