Mike Gold, a retired entrepreneur "living the dream in the Pacific Northwest."
This morning I attended my usual breakfast with some friends. We were talking about a visit to the barber and how much it cost.
At any rate, I related a story about growing up in Brooklyn and the fact that my dad liked to go to a local barber college to get his hair cut at a discount. While the full price of a haircut at the local barber shop at that time was $1.00, at the barber college it was $0.75. (And the fact of the matter was when my dad returned from his haircut – it looked like a $.75 haircut!)
Yesterday, I visited my local barber shop – where the full price of a haircut is $18 (but just about every shop has regular coupons which results in a price of about $15).
Back in the 1950’s, the minimum wage was about $0.75 per hour. Today a typical entry level job pays about $15 per hour. So in relative terms a haircut represented about an hour’s labor then and also now.
I got to thinking about other “costs” in today’s living versus back then. I recall my dad getting a new car just about every two years (he needed a very reliable car for his work). The cost then was, for his choice, just under $2,000. Today, a similar car is closing in on $30,000 (say a Honda Accord, or Chevy Malibu).
So in relative value, when an average annual middle class income in the 1950s was perhaps $7,000 per year, versus now it is almost $69,000 the cost of that new car today seems to be a “bargain” when you consider all the newest technology that car has. While most people would groan when told the cost is $30,000, compared to the 1950’s it is relatively less costly.
So while we all bemoan inflation, in fact we live at a higher standard today than then. This is principally because while inflation has increased dramatically (remember under President Carter – inflation was over 20% per year?), just routine advances in technology have made us able to afford far more for far less.
Just think of how chock full of stuff a modern home is today. I remember getting our first black and white television in the 1950’s. It cost about $250. Using the multiple above ($7,000 annual income then, almost $69,000 today) we get a multiple of almost 10.
So, a $250 TV in 1955, should cost $2,500 today. Go into Costco and you can purchase a very large flat screen smart color TV for under $500. A good chunk of this “relative” bargain is common in any mass manufactured product. Prices go down as the manufacturer gets more efficient and with economies of scale.
Then we have the ubiquitous candy bar. Go into a 7/11 and purchase a small chocolate bar. It costs about $1.50 (or more). Then watch a clip from a Seinfeld episode when an old timer bemoans the fact that you used to be able to purchase a Hershey bar for a nickel. Now here is a case where the today price seems to be way higher relatively than the old price. So why is that?
Inflation is a very tricky science. But it is usually said there are three main causes of inflation. Theses are:
1. Demand Pull Inflation: Simply stated, increase in demand with no equivalent increase in supply.
2. Cost-Push Inflation: When the cost of producing something increases, the supplier passes this increased cost along to the purchaser.
3. Rising Wages: similar to #2, as workers get paid more, the supplier, again, passes the increased cost along to the buyer.
Now this is a very very simple look at the causes. Every year thousands of advanced degrees in economics are earned studying this very complex subject.
But re the candy bar, clearly the “cost” of the ingredients has risen faster than the supply could – so a relative increase in the cost. You could also look at the fact that since the amount of arable (farmable) land is not increasing but the demand for candy (driven by the population as well as changes in eating habits) has increased, hence the higher cost for candy.
Last, let’s look at real estate. My parent’s first middle class home in 1954 cost $20,000. Today, in any major city/surburb that cost is over $500,000. So the “10” multiple should have had that house cost about $200,000 today.
Good luck in finding a middle-class home anywhere in the south Puget Sound area for $200,000. You can’t even find a small condominium for $200,000.
Again, in the middle ‘50’s, our population in the U.S. was about 170 million. Today it's over 330 million. That fact alone, should have had housing prices double without inflation. So if you add inflation, then population increase, that $20,000 home in 1954 should cost at least $400,000. A much closer approximation to our today’s actual housing cost.
So my conclusion is to increase your net worth, buy every piece of real estate you can. Also as many candy bars as well!