The economy is on a tear today. Driven by the post-shutdown bounceback, numerous rounds of stimulus, and the rapid rollout of the COVID vaccine, GDP is expected to grow over 6% this year, maybe even 8%. These are growth rates not seen since the Reagan years.
But the question now is, is this recovery about to get too hot? With a $2 trillion infrastructure plan on the table and all that stimulus money still to be spent, the risk is much higher inflation. And when inflation is expected to shoot higher, bond yields rise quickly, and stock investors look nervously for the nearest exit.
So what are the prospects for rapidly rising inflation? Not to worry says Mr. Powell at the Fed. Inflation may blip up this summer but prices will cool to below 3% by December. But still the worriers worry. The stimulus money is like gasoline on the fire, they say, and all that debt the government has taken on to cushion the COVID blow has to be a real negative at some point.
To get some perspective on inflation we turn to the authoritative source: The Hanson Index. Thirty-five years ago, a pundit we know was complaining that everyday prices were increasing at twice, or more, the rate of the government’s Consumer Price Index (CPI). So, to put the hypothesis to the test we constructed a list of 23 important, nay may we say indispensable, local items.
And the result? Over the longer term, 19 of our 23 items have increased in price faster than the CPI. Even over a shorter 3-year time period, prices in the Hanson Index have generally been increasing faster than the CPI.
If you are a babysitter, you have had three decades of ever-increasing pay. At the other extreme, a flight from Burlington to Boston is a bargain today. But this needs explaining. Back in 1986, Burlington to Boston was an important airline route. After 2001, however, the direct flight was discontinued. Today it is back, at a very discounted price, but you can be sure if the flight is successful, the price will be much higher a year from now.
The items in the Hanson Index have stayed constant over the past 35 years while the world has changed considerably. Some consumers today are going off grid and dumping cable, navigating TV on their own. Other providers such as Shelburne Shipyard and Leunig’s have been sold, and one original price, an Oasis Diner breakfast, is now only a distant memory. And what were we thinking – does a no-fault divorce exist?
The Hanson Index is not a statistically accurate index but, in this day and age of fake news, let us not quibble about facts. Just take a deep breath, pay the steep price for babysitting, and enjoy a night out. Sometimes we have to be philosophical — it’s only money!