Do you remember the “good ole days” when the change in your pocket would buy several gallons of gas instead of a few drops? Wow, it seems that our children just don’t understand how much more things cost today! Why is that anyway?
This months article stems from the many comments and questions from parents about how their children just don’t seem to understand that a dollar used to buy more than a pack of gum. We look around us appalled at how much things cost and wonder how to explain to our children that times have changed. Indeed, times have changed and regarding the value of money they will continue to change.
Numerous factors influence the value of money. Some of these include:
- Trade Flows; Imports & Exports
- Capital Flows; Foreign Investment
- Currency Markets
- The Central Bank; Intervention and Monetary Policy
- Interest Rates
- Economic Growth
The interconnective result of these factors can become quite complex, but the real influencer that unites them all is supply and demand. You might think of supply and demand as only impacting the value of “goods,” but it also impacts the value of currency. Greater supply results in less demand (price/value), and less supply results in greater demand (price/value). This seems obvious for products such as gasoline. Due to the recent hurricanes, concerns about limited refining drove up the demand for gas. Just the anticipation of limited supply drove up the price of gasoline. The same is true with currency too. If the Federal Reserve prints more money, the demand for money goes down and so does the value. This may not seem logical, but think of it like this; “If everyone were a Millionaire, it wouldn’t be so special any more,” would it? Now assuming that I still have your attention, let’s look at the real issues. Do we really have it harder than our grandparents? And,
In my opinion, the answer to both of these questions is no. If the past and present are any indicators, our children should have a better economic future than us. Since the advent of a modern economic society, prices have gone up due to inflation. Inflation, the continual increase in the price of goods, has been fairly predictable. The most common measure used for inflation is the Consumer Price Index (CPI). The Consumer Price Index simply measures the current price of numerous products on average as compared to the price of those same products in the past. On average, inflation in the United States based on CPI has been approximately 4.5% in recent history. This means that a “good” costing $1.00 today will cost approximately $1.05 this time next year. Remember, this is an average of both many “goods” and much time. Some products may inflate more than 4.5% and some years may see more or less inflation than others. You can use a balloon to demonstrate this to younger children; Slightly inflate a balloon. Explain that this is how much something costs today. Continue to inflate the balloon and explain the passage of time and the “inflating” cost as you go. Though inflation means that the value of the dollar or currency has continued to go down, there is a factor everyone forgets to consider which is income. Inflation impacts income and expense alike. Looking at the following gasoline pricing graph, we can see that the price for gasoline has steadily increased indicated by the blue line, but the relative cost has generally stayed between $1.50 and $3.00 per gallon indicated by the green line. In fact, during the 80’s and 90’s American’s paid the lowest gasoline prices in history relative to income. Perhaps that is why everyone is so shocked that fuel prices are back at the high end of the range, however, notice that they are still in the historic pricing range. Gas may cost twice what it did in 1984, but on average wages for Americans have doubled too.
It should be said that economic speculation about the future is based on past trends. Some trends have a statistically reasonable basis for future prediction and others do not. In other words, economists can make some predictions with a fair chance that it will happen and other predictions are just all out guesses. Without giving you a lesson in statistics, just remember no future economic conditions are sure, but some are probable, and some are totally unknown. For our children, we should teach them to plan for the likely reality, but don’t be caught off guard by the best or worst-case scenario.
One other key factor everyone forgets about is new inventions. You might ask what new inventions have to do with the economic benefit for our children? Consider one innovation . . . the tractor. How much manual labor has the tractor replaced. In a since, if one person and a tractor can replace 50 people, that one person can “reap” the economic benefit of all 50 of those people, or that one person can pass along the benefit of that productivity in the form of reduced pricing. Even the greatest kings of a millennium ago could not have imagined the luxuries poor Americans enjoy today. They would have only laughed or dreamed of a machine that preserves food for long periods, small boxes that record all the knowledge of the wisest men, and transportation devices that whisk us around the world in hours, whereas just over a century ago, Around the World in 80 Days was merely a fiction book by Jules Verne.
So . . . though a meteor could hit earth tomorrow and change everything we hold dear, current price escalations aren’t a reason to cry, “the sky is falling.” A much greater indicator of your child’s quality of life, regarding income, is education. But, that’s a discussion for next month.