This thought came to me as I was food shopping. So I know there are things that increase the price of certain items (beer, cigarettes, sugar tax – UK) but they also increase with inflation each year like other foods such as bread.
Apparently, the average inflation raise over the last 10 years in the US is 2.37% as of July 2023. So if it is the same in another 10-years, over the space of 20 years inflation would be 4.74%, if we say inflation is the same? And so on and so on. If it continues wouldn’t prices, for say, bread just end up getting higher and higher and be like $10-15+? And as wages don’t rise with inflation the same way foods do fewer and fewer people each decade could afford it?
Now this is just random thoughts I had when shopping and I am not making any comments on any politics. All I wanted to know is, is my thinking true that prices will just go up and up indefinitely decade-on-decade, why or why not? And I am an idiot so imagine I am 5.
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Edit: Went to sleep and woke up to about 300 notifications, thanks for your explanation to a Neanderthal like myself.
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Prices aren’t they only thing that changes, incomes also change over time. Consider the minimum wage in the US:
– 1940 $0.30
– 1950 $0.75
– 1960 $1.00
– 1970 $1.60
– 1980 $3.10
– 1990 $4.25
– 2000 $5.15
– 2010 $7.25
The rate of change in inflation and the rises in minimum wage don’t always match up, so there are times that your buying power shrinks. Right now is a good example, because the Federal minimum wage has stayed the same through some very inflationaryyimes
Yes prices continue to go up. So do wages though. Not always at the same rate but that’s a separate discussion. The damage deflation can do to an economy is really bad. So governments deliberately maintain some inflation to avoid it.
>Apparently, the average inflation raise over the last 10 years in the US is 2.37% as of July 2023. So if it is the same in another 10-years, over the space of 20 years inflation would be 4.74%
But the 2.37% average inflation is a per year average (e.g. 2.37% inflation in 2013, 2.37% inflation in 2014, and so on would mean average annual inflation was 2.37%). So if inflation stayed the same over the next 10 years, the average inflation would stay 2.37% (not increase to 4.74%).
Some inflation is a good thing. It encourages investment because holding onto money just devalues its worth if there is inflation. And yes, bread will probably hit $10-$15 sometime in the future. But wages still also have increased (hopefully by as much or more than inflation).
You’ve been responding but I think there’s some data you are missing.
Inflation going up year over year is more or less normal. We want a *little* bit of inflation–there’s various reasons for that we won’t go into, but most current policymakers target roughly 2%.
You seem incredulous that bread might be $10 after a while, and the answer is, yes, that’s going to happen–bread was fifty cents forty years ago.
Your other comments seem stuck on wages not increasing, but that’s not true–wages also increase. [See this chart](https://www.statista.com/statistics/1351276/wage-growth-vs-inflation-us/) for recent years. Yes, there was a period where inflation was higher than wages…but also a time when wages were higher than inflation. It’s never going to be exact and there’s going to be lags, but the lags happen in both directions.
[Here’s the real (inflation-adjusted) household income](https://fred.stlouisfed.org/series/MEHOINUSA672N) over time. There’s ups and downs but it’s obviously trending up–and that’s already taking inflation into account.
Edit: I’ve posted enough graphs from FRED. I’ve done my due diligence and I’m not doing your homework anymore. What I said is objectively true and can be verified by literally dozens of sources.
Inflation is cumulative. Using the US from 2011 to 2020 inflation was 18.7% i.e. what cost $100 in 2011 would cost $118.70 in 2020.
During that same period wages rose – this is a bit of a minefield to work out due to large wage differentials.
As inflation is cumulative, as above, then yes, prices will continually rise.
However! There always is a but isn’t there. Prices can fall due to demand and processes (e.g. Petrol). Prices can fall due ready availability of another resource to process a product (aluminium switching from carbon fuels to electric arc furnaces – in Piccadilly Circus in London is the Eros statue. This is made from aluminium which at the time of commission was horrendously expensive)
Food has generally got cheaper due to fertiliser, strains (“dwarf” wheat returns around 20% more yield than “old” wheat about five foot tall being weather affected)
This is a minor thing, but inflation is compounding so inflation over 20 years would not be 2x 10-year inflation.
~~The correct math would be 1.0237 * 1.0237 if you wanted to double the timeframe assuming the same rate, which is 1.04796 or 4.80% inflation over 20 years.~~
2.37% is the annual rate of inflation, stays the same in both the 10 year and 20 year if you are assuming the same rate in both periods. The total inflation over 10 years is 1.0237^10, 1.2639 or 26.39% and in 20 years it would be 1.5975 or 59.75%.
To the answer to your actual question has already been answered by others; wages do rise with inflation, it just tends to lag behind slightly.
[https://www.epi.org/nominal-wage-tracker/?gclid=Cj0KCQjwoK2mBhDzARIsADGbjepL2x5889A43ffDzp_UVRsCHrUObvR2F68_cDCzH8cnfe0-nXl0DVYaAvlfEALw_wcB](https://www.epi.org/nominal-wage-tracker/?gclid=Cj0KCQjwoK2mBhDzARIsADGbjepL2x5889A43ffDzp_UVRsCHrUObvR2F68_cDCzH8cnfe0-nXl0DVYaAvlfEALw_wcB)
The tables here show the average year-on-year (y/y) hourly wage changes in the US. Since 2007 it has always been between 1.5% and 4.7% with two exceptions:
1. COVID (first full month April 2021, wage increase was 7.8% y/y)
2. “The Great Resignation” – amidst rampant inflation between November ’21 and September ’22 wage growth was not less than 5.1% y/y
Looking at your 10 year example, in January 2013 the average hourly wage in the US was 23.75, in January 2023 it was 33.02. This is a 39% cumulative growth or 3.35% compound annual growth (CAGR.)
The problem is this does not affect all industries or all workers evenly. Some employees in some industries may have gotten no increase while others got twice as much. There are far too many factors impacting this to list here, but it is not just a “1% vs the world” impact.
edit: corrected the inflation logic. Thank you u/lucidspoon for catching my quick mental error.
In theory, wages are supposed to more or less keep up with inflation. That hasn’t happened super consistently, especially over the last 30 years or so, but it has happened and wages are rising. By the time bread costs $10 a loaf, in theory, the average person will look at it the same way that they look at a $3 load of bread today.
What’s relevant is PPP: Price Purchasing Parity, or “how much can you buy with your salary.”
And that is affected by if prices are going up faster or slower than wages.
For example, if your salary was $10,000/year and bread was $1/loaf–are you better off or worse off when bread goes up to $6/loaf but your salary goes up to $100,000/year?
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This is why, for long-term estimation purposes, economists sometimes talk about “how many hours does it take to earn enough to buy a loaf of bread.”
Now [take this discussion about purchasing power through history.](https://www.victorianweb.org/history/work/nelson1.html) For a carpenter (considered a ‘skilled laborer’) in 1450, for example, the table suggests he can buy 34.41 pounds of bread per day.
A loaf of bread weighs 2 pounds. Assume he worked 12 hour days–typical for that era–this means it takes him about 40 minutes to earn enough to buy a loaf of bread.
Today, consider a loaf of bread costing $5. [The average salary in the US is $53,490/year](https://www.jobted.com/salary); assume after taxes that person is taking home $20/hour. (Or around $40,000/year, divided by 2,000 hours per year. I’m spitballing here, bare with me.)
This means *today* the average salaried person can earn enough to buy a loaf of bread in 15 minutes.
So while bread is far more expensive (in terms of price) today than it was back in 1450, in fact, you can buy more loaves of bread today than you could back in the 1450’s.
>And as wages don’t rise with inflation the same way foods do fewer and fewer people each decade could afford it?
This is the assumption that gets you into trouble.
Wages do go up with inflation. The reasons you don’t notice it is the same for wages as it is for bread (most of the time):
1. It is generally gradual and slow
2. It does not go up linearly, but in unexpected spurts
3. Individual experiences do not line up very well with systemic changes
4. There are so many side-effects that it would be pretty hard to notice, even if the first three points did not mask the change
One of the main drivers of inflation *is* wages anyway, so it would be a bit odd if they were completely unlinked.
The overall increase in wages can also be masked, because older industries lose their importance (thus, wages in those industries stagnate) even as wages over the entire economy are going up, perhaps even faster than inflation. So if you follow the wage of a coal miner, you might see their wages stagnate or even declines. But that has more to do with the overall importance of coal to the economy declining than anything related directly to wages. This is part of how economies gently (or not so gently) push people into working where they are most needed.
Finally, we have just gone through a few years of…weirdness. Markets are still trying to adjust. And if you are in the U.S. you have an additional decade of weirdness coming at you.
The “IRA” — one of the most cynically named pieces of legislation ever — is all about moving manufacturing back to the U.S. It will most certainly *increase* inflation as the manufacturing base is built out, with all the monetary slushing that this entails. The people who wrote the IRA knew this would happen, which is why the name is so damn ironic.
I am no Biden fan by any stretch, but despite the extremely misleading name, this is a *powerful* piece of legislation that is exactly the right move at the right time. I’m a little jealous here in Europe that the U.S. has figured out what is going to happen over the next decade or two, but we are still futzing about as if nothing has changed. I just wanted to throw that in there.
In any case, this is going to cause even more strangeness in the price structure in the U.S. as you wean yourself off the previously cheap labor in China and rebalance the economy to include more manufacturing.
Be careful when consuming headlines. They tend to simplify to the point of being misleading. Also keep in mind they depend on clicks to survive. “Everything is fine, have fun” is probably not going to get as many clicks as “People starving as wages stagnate!” And I do not want to say that there are no problems, but the headlines sometimes point us in the wrong direction or give the wrong impression.
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