Are we experiencing massive deflation??

There was very interesting post yesterday by Professor Mark Perry of the University of Michigan's School of Management. While we've all been coping with rising prices at the pump and at the supermarket, he's got another way to look at the numbers.

In truth, in spite of all the noise and fear, we've actually seen prices go down dramatically in a number of products. While we focus on food and energy prices, we've seen the following:

Computers have seen prices go down by 90% over the past 10 years.
TVs have experience a 76% drop over the same period of time.
Even autos have dropped by 3.4%

What to make of all this? Professor Perry looks at these drops in light of the fact that average hourly earnings have increased by 40% over the last 10 years. Or, in other words, Perry posits "...there are many, many products that are significantly cheaper today than ten years ago, especially after adjusting for increases in earnings."

So, why don't we pay attention to these dips that make it massively more affordable for me to set up my 73" Flat Panel TV screen?

While Prof. Perry credits the gradual nature of these price drops, I think it's human psychology. Behavioral finance has shown that in investing, we focus a lot more on losses than on gains. So too at the pump -- we're thinking about how much more a gallon of gas costs us than how much less a MacBookPro costs from a couple of years ago.

Zack Miller is the managing editor of IsraelNewsletter.com and a former equity analyst for a leading multinational hedge fund

Reader Comments (Page 1 of 1)

7-24-2008 @ 11:29AM

Jeff said...

This isn't interesting at all. It's called economies of scale, and perhaps Moore's law.

Most realistically, it's called, I want to get my article published, so I make an absurd calculation.

7-24-2008 @ 11:51AM

Jason said...

I agree with Jeff.

How often do we buy TV's or computers compared to how often we buy gas or groceries? Better yet, how much do you spend on each of those?

www.eeinvesting.com

7-24-2008 @ 1:08PM

Debra said...

And I agree with Jason & Jeff. Additionally, when economic times are tight, households can delay (indefinitely) purchases of televisions, computers, electronincs and other high(er) ticket items. Not so with recurring expenses such as gasoline, food, healthcare, utility bills, etc. Therefore, the sky-rocketing increase in the cost for these is felt much more immediately and deeply.

7-24-2008 @ 2:27PM

Espinosa said...

Macbook Pro's have become faster but haven't dropped in price from two years ago.

7-24-2008 @ 3:01PM

william lindblad said...

It depends on how you figure inflation/deflation. Note that all the items that are mentioned are singular, by that I mean random purchase. They are not everyday items. The government does separate the two types of purchases and does use this as a measure of inflation. According to their method, inflation is present when the singular items go up in price. Since inflation is rampant in the rest of the world, we should be happy that it is not here.
Now go sell this on the streets of the U.S.

7-26-2008 @ 8:19PM

baziz1 said...

All these products are manufactured in Asia, thats why their prices keep falling.