Inflation! Panic!

This week in sensational journalism: inflation.

CNNMoney ran an article Tuesday warning of the wrath of rising food prices. Among the examples of food's assault on our wallets: A pound of bread now costs 3% more than a year ago; the price of potato chips is up 1% since last year, and -- hide the children -- a dozen eggs now costs a debilitating two pennies more than a year ago.

Then came the real whammy. "Food prices in January rose 1.8% from the prior year, marking the fastest pace since 2009."

Panic!

Deep breath. Count to 10. Carry on.
Food prices might be rising at the fastest pace since 2009, but hold on a second. The time between 2009 and today actually marked the slowest rise in food prices since the government started keeping track in the late '60s. Today's two-year high was basically guaranteed by default.

And then there's this: January food prices were indeed up 1.8% over a year ago, but that's way below the annual average of 4.4% since 1967. January's 1.8% jump would actually be the fourth lowest annual increase in the past 44 years. So on one hand you could say current food inflation is the fastest in two years. On another, you could say it's among the lowest in two generations. Take your pick -- depending on how sensational a mood you're in.

More important than putting food prices into context is a point New Yorker columnist (and former Fool writer) James Surowiecki made last fall:

Why is inflation unpopular? The biggest reason, [economist Robert] Shiller found, was simply that people believe higher prices reduce their standard of living and make them "poorer." This is obviously true for people living on fixed incomes or off their savings, but for everyone else, as many studies have shown, inflation translates into higher incomes as well as higher prices, and it typically doesn't have much of an effect either way on people's standard of living.

It's wrong to talk about increasing prices without also discussing increasing wages. What matters is your purchasing power -- how much stuff you can buy with the amount of money you earn. Inflation is only damaging when it rises faster than your paycheck. That's when you lose purchasing power. That's when you become poorer.

But consider this. While food prices rose 1.8% over the past year, average hourly wages increased 2.4%. An average wage buys more food today than it did a year ago. Most people are better off. And yet there's a growing fear, almost paranoia, that rising food prices are pilfering our wallets. Of course, that can happen. In the '70s, late '80s, mid-'90s, and early 2000s, food prices rose faster than wages. But that's simply not happening today. In fact, wages are growing faster than food prices at a rate that's almost four times higher than the 40-year average. Not only did most people gain food purchasing power last year, but they did it at a pretty good clip.

Same holds over longer periods. Since 2000, food prices have increased 34%, but average wages are up 41%. Other areas, like medical care, grew faster than wage growth. An average wage today buys less medical care than it did before -- no arguments there. But if food is the issue, and it has been lately, the inflation fears just don't add up. The average American wage buys more food today than almost ever before. Hold the panic, folks.

Better yet, worry about where you invest your money
It's true that those on a fixed income are losing purchasing power, but this has been true nearly every year for the past century. To the extent possible, and when time is on your side, the goal should be an investment portfolio that's categorically not fixed income. Since the late '60s, inflation has pushed prices 633% higher. This might seem awful, but only if you forget that the S&P 500 increased 4,500% during the same period. Companies with strong pricing power fared considerably better. Procter & Gamble (NYSE: PG  ) grew over 12,000%. Altria (NYSE: MO  ) surged about 250,000%. Even Ford (NYSE: F  ) , death scare and all, has returned 3,500% to shareholders since 1970. Inflation has only made you poorer to the extent you allowed it to.

Will real inflation return some day? Of course. Deal with it when it comes. And when it does, keep things in perspective. The economy goes nuts from time to time, but trouble passes. That, too, has been true almost every year for the past century.

Check back every Tuesday and Friday for Morgan Housel's columns on finance and economics.

Fool contributor Morgan Housel owns shares of Altria and Procter & Gamble. Ford Motor is a Motley Fool Stock Advisor pick. Procter & Gamble is a Motley Fool Income Investor recommendation. The Fool owns shares of Altria Group and Ford Motor. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


Read/Post Comments (5) | Recommend This Article (23)

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  • Report this Comment On March 11, 2011, at 11:58 PM, Khizhim wrote:

    Morgan:

    You said:

    "Then came the real whammy. 'Food prices in January rose 1.8% from the prior year, marking the fastest pace since 2009.'

    Panic!

    Deep breath. Count to 10. Carry on.

    Food prices might be rising at the fastest pace since 2009, but hold on a second. The time between 2009 and today actually marked the slowest rise in food prices since the government started keeping track in the late '60s. Today's two-year high was basically guaranteed by default.

    And then there's this: January food prices were indeed up 1.8% over a year ago, but that's way below the annual average of 4.4% since 1967. January's 1.8% jump would actually be the fourth lowest annual increase in the past 44 years."

    AMEN!

    This type of mischaracterization of rates of change may also often be seen in reports of other macroeconomic statistics. It seems to be necessary to step back and to attempt to recognize trends. Comparing the zigs and zags of one week's Initial Jobless Claims report with the previous week's values may be inappropriate if both weekly reports were well within a longer-term trend.

    Trends may not have been of interest to the Motley Fool in the past. The concept of a trend may have been inconsistent with TMF's advocacy of a Graham and Dodd microeconomic focus on companies' fundamentals. The MF seemed to agree with Graham that investors should ignore most of "Mr. Market's" mood swings and shouldn't attempt to time stocks or to time the market but isn't the business cycle acknowledged by most observers and isn't it a good example of a trend?

    Is the idea that data series can fluctuate in trends which persist over time thought to be valid mathematically or is it questionable? Is it also necessary to believe in the concept of "momentum" in order to believe that ANY data series can trend up or down? Is momentum acknowledged as a valid concept or is it thought to be a figment of the imagination of technical analysts? Don't advocates of fundamental analysis believe in "earnings momentum"?

    It seems reasonable to suggest that economic statistics or securities prices or quarterly earnings or any data series is only a series of measurements of real-world conditions which change over time, but which change gradually. Those gradual changes over time seem to explain uptrends and downtrends. No questionable concepts seem to be necessary...

  • Report this Comment On March 12, 2011, at 8:47 AM, TicoHombre wrote:

    While food may not be increasing at an alarming rate, the spam on these articles is!!!!!!!!!!!!!

    Give me a break!

    Also, who can afford to get in the car and go to the store to buy this inexpensive food when gas IS increasing at an alarming rate. That is newsworthy.

  • Report this Comment On March 12, 2011, at 4:12 PM, nlcondit wrote:

    Our food priced in the UK have risen 4.9% year on year from a combination of world food trends, VAT increase, and retailers trying to increase their profits. We are certainly noticing it at the check-out. Combine that with gas prices topping £1.35 a litre with a 5p increase expected in April from a rise in duty and oil prices. And my husband hasn't had a pay rise in three years so all told my math says I am in fact materially worse off.

  • Report this Comment On March 13, 2011, at 11:09 AM, skypilot2005 wrote:

    Morgan,

    I am surprised you didn’t review worker productivity data in this article. It maybe a reason wide spread inflation hasn’t occurred.

    I fear inflation is going to appear sooner rather than later because of the large deficits the Federal Government is running.

    I am beginning to question the information I learned in Economics’ classes YEARS ago. :)

    I enjoyed the article.

  • Report this Comment On March 14, 2011, at 6:37 PM, masterN17 wrote:

    Maybe in the US food prices are increasing only slowly, but across the world the situation is much more dire. This is not central to the discussion at hand but something worth keeping in mind.

    Also it just makes organic food (I mean real food) start to seem cheaper by comparison. :)

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