Is Christmas even merrier than in 1967?
This graph in the FT caught my eye:
The graph shows two measures of the rate of increase in the “cost of living” in China. The blue line is the government CPI, while the red line shows the results of public opinion surveys.
At first glance they look pretty similar, but check out the two scales. Chinese CPI inflation has been running at about 2% in recent years, while the public’s estimate of inflation is around 6%. The gap was even bigger in the (booming) early 2010s. So what’s going on here?
This is just one more illustration of my claim that inflation is a pretty meaningless concept. To economists, it’s the increase in the price of a bundle of goods, adjusted for quality changes. To the public, it’s the increase in the cost of “living the way we live now.”
Thus if a nice flat panel TV cost $600 today, and a nice black and white TV cost $300 back in 1967, then the public would say that the TV part of the cost of living has doubled, while economists would say that the price of TVs has plunged by something like 90%, because the quality improvements have been so massive.
[In 1967, I frequently had to shake the antenna on top of our TV set, to prevent constant flickering and “snow”. I didn’t even know that the Wizard of Oz was a color film until I saw it in the theatre at age 35.)
Alternatively, the public would say that Christmas today is about equally merry as in 1967, while economists would say that today’s Christmas is far merrier due to technological progress.
Here’s my take on the Chinese data. The top line is strongly correlated with growth in NGDP per capita, i.e. average income. If Chinese living standards are rising rapidly each year, then this factors into what people feel they need to earn to “keep up with the Zhangs”. They are interested in knowing how much it costs to have a middle class Chinese lifestyle. Indeed this concept may be even more important in “communist” China than in supposedly materialistic America.
On closer inspection, however, the rise in the perceived Chinese cost of living is a bit less that the rise in NGDP. And I think that’s due to lifecycle effects. Thus the older Chinese don’t need all the fancy new gadgets that millennials buy, and hence their cost of living rises a bit less rapidly than the overall rise in NGDP/person.
I’d expect that surveys of American perceptions of inflation would show something similar; a subjective inflation rate that is above the official CPI, but below the growth rate of NGDP/person. Does anyone know of such a survey?
PS. The FT article says the Chinese economy is accelerating into 2018. It looks like those who predicted that the Chinese “bubble” would burst will be wrong for the 40th year in a row. Indeed 2018 looks like a relatively strong year for the entire global economy.
PPS. Check out the new Tianjin library:
Merry Christmas and a Happy New Year to all my readers.
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25. December 2017 at 09:37
I see no reason to believe the economy will accelerate into 2018, either in the U.S. or worldwide.
25. December 2017 at 15:11
Merry Christmas, Scott, and thanks for another year’s blogging. Surely property prices must feed into subjective measures of cost of living? In Australia- and I presume China – the rising price of residential property in the largest cities has been a huge topic of public debate, with many millennials increasingly feeling they will never be able to afford the sort of house their parents have.Millenials also complain about rising tertiary fees. On the other hand, I would argue that technology and trade has made millenial life a lot cheaper than it was for my generation (X). A/V-based entertainment is now almost free, and clothes and cars are a lot cheaper in real if not nominal terms than in the 1990s. And as you’ve pointed out in the past, today’s young aren’t interested in the audiophile-quality stereos that consumed my first half-year’s work savings. As for older people in China, well they presumably own their homes and so are not exposed to rising prices in the same way. On the flip side, I presume healthcare quality and prices have been rising there as much as in the West? But on balance, I can see how their subjective cost of living has been rising slower than the young’s might.
25. December 2017 at 17:51
Nice post, but sheesh!
In large swaths of the US and in many major cities in China (notably Hong Kong and Shanghai) the big cost story in life is housing. A TV is $300 once every 10-20 years. Housing is many multiples of that monthly.
Many people have an accurate perception of living standards and costs.
In the US health insurance becomes very costly after age 55 but before Medicare, though quality is usually higher than a couple generations ago. At least I hope so.
25. December 2017 at 18:50
Add on:
“Oct 26, 2017 – Nano flats, or apartments each smaller than 200 square feet, will be the new norm in Hong Kong as 2100 of such complexes are on drawing boards through 2020.”
http://www.scmp.com/business/article/2116992/nano-flats-expected-flood-hong-kong-market-first-time-buyers-continue
Are Hong Kongers obtaining higher standards of living in the city-state frequently deferred to as the freest economy on Earth?
So why the nano-flats?
Are 100-sq-ft. flats in the future when even higher living standards are obtained?
25. December 2017 at 20:49
Merry Christmas, Scott.
On the issue I agree with Benjamin Cole a bit more. My grandfather had an average job at best but somehow managed to own three houses at once, two of them which he built by himself from scratch.
My father got one of them and managed to remodel it. That’s still better than my generation who stand at 0 so far (and no change in sight). And we children make more money than my parents and grandparents for sure (adjusted for your kind of inflation).
Health costs also really exploded, and compared to the costs the impact on mortality rates and quality of life was rather small.
Similar things can be said about TVs, and cars, and so on. Your theory about TVs seems plausible, but in the end a TV is still a TV. And a car is still a car. We dreamt about flying cars in 2000, remember? Instead we got Twitter and 140 characters. Okay it’s 280 now.
I suggest that we limit the massive inflation of bureacracy and legislation to 280 of X a year. Now that would be progress.
Back in the days building a house was just about building a house. Today it’s a moon landing. And before even starting they want you to buy the moon first.
25. December 2017 at 21:46
You asked:
https://tradingeconomics.com/united-states/inflation-expectations
Only 54 months. Still, consumers predict a significantly higher inflation number than official readings.
https://fred.stlouisfed.org/series/MICH
Consumer average inflation expectations/perceptions 1978-present = 4.0%
1978-present average CPI = 3.0%
1990-present Chained CPI = 1.5%
It is quite clear that average people almost solely look at nominal prices. They don’t consider real inflation changes or quality improvement. The money illusion.
Nonetheless, the China CPI, US CPI, FT inflation perceptions data, and Michigan inflation perceptions data all appear to move in unison. So…
1. Government inflation data is generally accurate. For the USA and China.
2. Consumers practically always estimate higher cost of living increases than reality shows. The only exception is 2008-2009 in the USA.
3. It is really difficult to, as a consumer, have a mindset where you take quality improvements into account. You need decades of life experience to see these changes.
25. December 2017 at 22:17
I’m not sure if you’ve blogged on the idea of a meat tax before, but given your views on the environment and luxury taxes, I thought you might find this article interesting:
https://www.theatlantic.com/health/archive/2017/12/should-meat-cost-more-than-gold/548264/
25. December 2017 at 22:22
Also related, it could be interesting if a decade from now we see taxes on “real” meat but not lab-grown meat:
https://blogs.scientificamerican.com/observations/lab-grown-meat-is-on-the-way/
25. December 2017 at 23:06
Rajat, Why aren’t the young out in the streets protesting housing policies?
Christian, You said:
“Your theory about TVs seems plausible, but in the end a TV is still a TV.”
Did you even read my post? You seem to have absolutely zero reading comprehension. Pathetic.
Thanks Alec, that’s what I expected.
Garrett, I suppose a carbon tax would hit cattle ranches.
26. December 2017 at 02:52
Scott, the young – or at least their proxies in the media and think tanks – are protesting in the streets; in some ways you would approve of and others you wouldn’t. Virtually all the debate is about demand-side policies, specifically, ‘negative gearing’ (NG) and the capital gains tax (CGT) ‘discount’. NG involves allowing investors to deduct the excess of investment borrowing interest expenses over rental income from their taxable salary income. This is obviously most beneficial to high-income investors. It’s been around forever but is under increasing scrutiny and the Labor opposition is vowing to get rid of it. The present CGT discount allows investors to declare ‘only’ half the nominal gains they make on the sale of investments (including properties). Labor intends to allow only 1/4 of the gain to not be declared. Almost no-one accepts that this would be double-taxation of returns to saving. As I’ve said before, Australia has a very shallow pool of professional economists and most are sufficiently progressive to not get excercised over this particular issue.
There is very little attention from the young on supply-side policies, I think for two reasons. First, supply-side constraints are seen as inhibiting rapacious land-owners/capitalists. But second, my personal theory, is that while Millennials cry poor, like everyone else that went before them, they want a piece of the action. Any millennial with an ounce of aspiration in their blood wants prices to retreat just enough for them to jump on board, and then for appreciation to recommence. So they don’t really want a structural change to house price growth. Perhaps I’m being overly cynical, but it seems the most likely explanation.
26. December 2017 at 02:59
“In other news, Japan unemployment hit a 24-year low of 2.7% in November, reported officials. The ratio of open jobs to applicants rose from 1.56 to 1.55 to reach the highest level since January 1974.
However, November core consumer prices were up only 0.3% YOY, continuing to confound the Bank of Japan’s plan for 2% inflation….”
NAIRU is out there. Somewhere. Somewhere…..
26. December 2017 at 06:47
Romesh Ponnuru, and erstwhile Market Monetarist, writes a glowing review in the National Review of Trump’s First Year.
http://www.nationalreview.com/article/454927/donald-trump-strong-first-year-report-card
I wonder what is about Trump that can make even people with similar outlooks on many issues—say Ponnuru and Scott Sumner—come to diametrically opposed assessments of Trump?
26. December 2017 at 06:48
Europe is getting its act together. US labor market is in a pro-worker / pro-consumer sweet spot with record profits to burn through. Massive fiscal expansion in US. All that should mean ample trade deficits
Read that China will install more solar capacity next year than exists in US. On the LinkedIn guy’s podcast, he claims that China has 5 cities that r innovation hubs on par with Silicon Valley
Their big neighbors r growing fast, too
I sure hope China continues to grow because their savings r ripening my PNW hometown
26. December 2017 at 09:02
Rajat, You said:
“Any millennial with an ounce of aspiration in their blood wants prices to retreat just enough for them to jump on board, and then for appreciation to recommence. So they don’t really want a structural change to house price growth. Perhaps I’m being overly cynical, but it seems the most likely explanation.”
That would not be selfishness on their part, it would be stupidity. It’s a false assumption.
30. December 2017 at 09:16
Thanks for posing Scott! I love the library, great design but most those books are fake (stickers).