A Look Back at Inflation

It’s not unusual to get nostalgic, looking back at images or other relics of bygone days. In fact, a popular restaurant chain, Cracker Barrel Old Country Store, Inc., has built this well-known tendency into their decorating scheme. You can find Cracker Barrel restaurants in every state except Alaska, Hawaii, Vermont, Washington, and Wyoming. Any time you walk into Cracker Barrel, you’ll be surrounded by memorabilia from yesteryear: hand implements from the farm, kerosene lanterns, portraits of people who look like they could be your grandparents’ grandparents, signage for products like molasses and animal feed, and, maybe most interesting of all, lists of goods for sale—especially antique restaurant menus.

Invariably, looking at the prices paid for everyday items in years gone by, we always notice the same thing: stuff used to be a lot cheaper! You could get a ham-and-egg breakfast for a quarter; a tuna sandwich for 30 cents; a draft beer for a dime; and so on.

What we’re talking about, of course, is inflation; the tendency of the cost of goods and services to rise over time. It has been going on for a long time, sometimes gradually and sometimes, as in the present, more abruptly. But inflation has been with us almost constantly, except for brief periods of deflation, for generations.

If you need further proof (or you just want another dose of nostalgia), go to a website called Stacker. There, you can input the year of your birth (any year beginning with 1930) and see what things cost when you came into the world. In 1930, for example, a carton of a dozen fresh eggs cost 45 cents, a pound of sliced bacon was selling for 43 cents, and ten pounds of potatoes cost 86 cents. Compare these prices with what you paid for the same items on your last trip to the grocery store, and you have a clear illustration of how years of inflation can erode the value of the dollars you have to spend today.

It’s especially painful to look back as recently as 2019, when a dozen fresh eggs sold for $1.40 (today roughly $4.82), a pound of white bread could be purchased for $1.30 ($1.87 today), a pound of sliced bacon cost $5.61 ($6.81 today), a pound of round steak cost $5.83 ($7.27), and a gallon of fresh milk would set you back $3.04 ($4.43).

The relationship between average wages over time and the cost of items is also interesting. Back in 1970, the average worker was earning $9,400 a year, and the cost of a new car was just $3,450 on average. Gas cost 36 cents a gallon, and the average home was selling for $23,450. In 2000, workers were earning $41,673 on average, and car prices had jumped to $21,850, nearly the price of a new home 30 years before. Average home costs had jumped to $119,600, and a gallon of gas was $1.26. The point: inflation raised costs, but it also tends to raise incomes as well. By the way, that’s true for businesses, too, up to a point. As we know, when a company’s cost of acquiring goods rises, it can pass those increases along to its customers in the form of higher prices. But when prices rise too far too fast, customers stop buying, and prices must either fall or customers’ wages must increase in order for the sales cycle to continue.

Right now, the rise in incomes is running well below the inflation rate, but it is unclear to some analysts whether that can continue. And if wages rise commensurate with inflation, that will further increase the cost of production and, presumably, prices—possibly, eventually, reducing demand. That combination, by the way, is what was referred to in the 1970s as “stagflation”: an economic condition where rising inflation is accompanied by slowing demand and rising unemployment.

At present, corporate earnings appear to remain stable in most cases, and unemployment is actually slightly lower than it was before the pandemic. Analysts and investors will continue to watch these and other signals closely, along with monitoring Fed actions to slow inflation, for further clues about the future health of the economy.

As a fiduciary wealth manager and financial advisor, Modera Wealth Management knows that you need authoritative, evidence-based guidance during these times. We are committed to staying abreast of the most current economic, financial, and investment research in order to provide the advice you need. To learn more, read our recent article, “Markets Don’t Wait for Announcements.”