MORE DURABLE THAN EXPECTED

The Head of Bank of Amigo states the obvious.

Inflation numbers came out at 3.5%, way below those pesky “expectations,” which never seem to be correct. Outlets such as the New York Slimes or the DemoKKKrat mouthpieces such as Axios or Politico always add some caveat that “But don’t worry, it will come back when oil prices rise.”

Maybe. Maybe not. I have long touted a pretty old study by Sheila Hopkins and Sir Henry Phelps-Brown (dontcha love hyphenated names? I always thought “Schweikart-Von Stumerberg would be cool) called “Seven Centuries of the Prices of Consumables” (1956). They went back 700 years to develop a new “market basket of goods” that would remain constant. “Aren’t they all?” you ask? Well, they try to be, but Sheila and Hank weren’t alone in noticing some big problems with the interpretation, the most recent being Robert Gordon’s magisterial The Rise and Fall of American Growth (2016).

No one summed up these ideas better than the great George Gilder in his classic Wealth & Poverty (1981). As he noted:

“Phelps-Brown reasoned that the changes in the contents of the [market basket of goods chosen by economists] necessarily overshadowed in importance the price changes between the baskets of different eras. Prices, it was implied, coul dnot be interpreted as the ratio between the quantity of money and the quantity of goods, because “goods” in a society are continually and multifariously changing in quality and context, and they all elude simple measurement.”

For example, the price of a 2026 auto may be compared to that of a 1969 Camaro, but the vehicles a) aren’t even remotely the same, and b) both depend on a host of other technologies, services, or products to provide a context in which to evaluate their “price.” I often say I wouldn’t take a Ferrari if you gave me one, because I don’t have any of the associated wealth that would make it useful. I don’t have a specialized garage. I couldn’t begin to afford even the most routine maintenance, and someone at my wealth level would freak out if, as so happens in Arizona, driving down a road you get hit by a flying rock from the car in front of you. With my Honda Accord? Big deal.

So our cars in each iteration depend on such things as roads, abundance of fuel and fueling locations (which has been a detriment to electric vehicles), taxes, the availability of—-and desirability of—-alternative forms of transportation, and even culture. My colleague at the University of Dayton, John Heitmann, showed in his book, The Automobile in American Life (2009) explained that America developed a “car culture” that precluded mass transit—-which of course was made impossible by our sheer distances. In other words, a non-economic factor that shaped cars and car prices.

Hopkins and Phelps-Brown called into question the very foundations of the study of prices. Gordon elaborated by noting that it’s simply stupid to have a “market basket” that includes a candle for the early 1800s, which was replaced by a light bulb in the early 1900s. Both give light. But all the associated qualities of the light bulb make it something different. For one thing, the amount of lumens produced by an electric light bulb are much higher than those produced by a gas lamp or candle. For another, the presence of gasoline/kerosene in containers around a flame—-which could break—-introduced a whole different level of danger and risk not found in an electric light. It should be no surprise that large-scale city-wide fires declined significantly after electricity replaced gas lighting in urban areas.

You get the picture. The old “printing too much money” analysis for all inflation is wrong. As (now Fed Chairman) Kevin Warsh once wrote in his Forbes article, the “Hamburger Paradox,” prices are driven by wide and varied pressures and not a simple rise in, say, the price of beef. These are essentially cultural forces that will appear for some time, then level off. But they never drop down to previous levels. The price range does not look like the Alps—-up and down—-but rather, over almost 1,000 years, have looked like stairs. Prices go up, then they settle for a long period of time. Then they rise again.

The “stair step,” in fact, coincided with something else that Hopkins, Phelps-Brown, and Warsh discovered, namely that long plateaus lasting hundreds of years culminate in a “prolonged inflationary surge to a new level” (Gilder, 233). So what were these “prolonged inflationary surges?” They were massive, society wide shifts for the better. For example, they were associated with

*The Commercial Revolution (1400s)

*The Capitalist/Industrial Revolution (1700s)

*The Energy Revolution (late 1800s/early 1900s)

*The Computer Revolution (1980s)

*The AI Revolution (right now)

It explains to a large degree why virtually all prices rise, as opposed to one or two products jumping. Bottom line: don’t expect most prices to ever fall. Rather, if the past is a guide, soon the productivity gains of the new technologies and processes will lead to wages that outstrip inflation (see, for example, the 1920s).

This is precisely why the economy is “more durable than expected.” Economists expected the wrong thing. We are in the midst of an AI revolution that after a great deal of sorting out—-perhaps a decade—-will result in sharply rising wages. That is no consolation for those who are always harmed by such revolutions. But, they are inevitable.

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Larry Schweikart (@CyberneticsLS on Truth, @LarrySchweikart on X)

Rock drummer, Film maker,NYTimes #1 bestselling author

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