In a recent National Review Online article (“Inflation Vacation”), Amity Shlaes complained that taking a summer vacation today is a lot more expensive than it was in 2000. She pointed to higher prices for gasoline, coffee, haircuts, movies, postage and college tuition (a topic of discussion while vacationing). These nominal price increases (none were adjusted for inflation or wages) are “discomforting” to Amity and that discomfort is summarized here:
You’re on vacation. Other people are water skiing, so you have a few hours to think about this [the fact that many nominal prices are higher than in 2000]. When you wake up from your sofa snooze, you see there is another way to look at the discomfort you’re experiencing: The price zap is an inflation zap.
Shlaes then goes from complaining that the nominal prices of three different goods (gas, coffee, stamps) and three services (haircuts, college tuition, movies) have risen in the last 14 years (no big surprise there), to buying into the fringe-crank conspiracy theory of John Williams (and his Shadow Government Statistics website) that the BLS has been manipulating its calculation of consumer price indexes to intentionally present biased, and significantly understated official measures of inflation. Both Jimmy Pethokoukis (“Why Amity Shlaes is dead wrong about inflation”) and Romesh Ponnuru “(Inflation Cranks Keep Cranking”) responded to Shlaes, and then Paul Krugman, in his typical conservative attack style, responded to both of them on his post “Understanding the Crank Epidemic.”
I think there is a general consensus (at least among Jimmy, Ramesh, Krugman and myself) that we should: a) “stop using John Williams and his ShadowStats site as source for inflation arguments” (Jimmy), b) “stop paying attention to statistical cranks” (Ramesh) and c) “stop turning to cranks peddling conspiracy theories about inflation” (Krugman). Case closed there.
Setting aside the “statistical crank” issue, I heartily agree with Jimmy P. that Amity Shlaes is “dead wrong about inflation.” Jimmy cited some macro data on the general level of recent inflation (from the BLS and MIT’s Billion Price Project) and some data on inflationary expectations from the Cleveland Fed, all showing very moderate rates of inflation, both actual and expected. A more micro analysis of specific goods and services associated with taking a vacation also fail to demonstrate conclusively any significant inflationary pressures.
Let’s do some number-crunching and see why Amity’s “inflation fretting” is unsupported by the actual evidence on some of the actual vacation-related prices in 2000 vs. 2014, once those prices have been adjusted for inflation (or wages). In addition to Amity’s examples, I’ve also included some additional price data that would suggest that the inflation-adjusted costs of many goods and services associated with taking a vacation are actually lower today, not higher, than in 2000. The table above summarizes those comparisons to accompany the discussion below.
1. Let’s start with average hourly earnings for private workers, which increased by 47.2% from $13.98 in June of 2000 to $20.58 in June 2014. Adjusted for overall price inflation of 37.7% during that period, there was an increase in real wages of 6.9% between 2000 and 2014 (calculated as [(1.472 / 1.377) – 1 = 0.069 or 6.9%]), see table above. Accounting for wages on an annual basis, the typical full-time worker today would earn about $2,500 more per year than a worker in 2000 (in today’s dollars). For a family with two-full time workers, they would have $5,000 more in income this year than in 2000, making a summer vacation more affordable now than 14 years ago.
And yet Amity tells us that: “In other words, you’re beginning to realize that maybe you don’t have it so good….. Wage growth overall is slower than it should be…”
Bottom Line: Measured by average hourly earnings adjusted for inflation, real wages have gone up by 6.9%, making the cost of a vacation today more, not less, affordable than in 2000, before even considering any specific prices.
2. Since we’re talking about taking a vacation, let’s analyze the products and services that you would use to book your hotel room – cell phone, computer, and Internet access. Adjusting for inflation, we find that the cost of using your cell phone has fallen by 46% since 2000, the cost of your laptop computer has fallen by more than 91% and the cost of your Internet access has fallen by almost 41%. The CPI for lodging at hotels and motels has fallen by 10% since 2000 in real terms, so you’re off to a pretty good start – you’ve already saved a lot of money just getting your vacation booked compared to 2000, and you haven’t even left home yet.
3. If you’re flying, you’ll save a lot of money today compared to 2000. Adjusted for inflation, the average airfare in 2000 was $434.44 according to data from Airlines for America, compared to the average price of a ticket in 2013 of $362.85 (most recent data available). Therefore, your real airfare is 16.5% lower today than in 2000, and you’ll save about $72 per person, and $286 for a family of four if you travel by air for your summer vacation.
4. If you drive for your family vacation, it is true that gasoline, adjusted for inflation, is about 64% more expensive this year than in the summer of 2000. But the average fuel economy of today’s cars at 24 miles-per-gallon is 23.7% higher than the 19.8 mpg average in 2000. Also, the cars and highways today are 27.5% safer than in 2000 measured by the number of annual highway deaths adjusted for miles traveled. Further, adjusted for inflation and quality improvements, new cars today are about 25% more affordable than cars in 2000.
5. What about food? Amity complained that coffee has increased by $3.40 to $5.20 per pound between 2000 and 2014, a 53% increase, but makes no adjustment for inflation or wages. That would be an 11% real increase in the price of coffee, but the series CPI-Coffee shows a real decrease of almost 8% and the CPI series for Coffee and Tea shows a real price decline of more than 12%. Coffee is just one price, and tells us nothing about overall food inflation. The two much broader CPI series for full service meals and limited service meals that would apply to meals while on vacation increased by 45% and 49% respectively between 2000 and 2014, which are both greater than the 37.7% increase in the CPI but about the same as the increase in nominal wages.
6. What about clothing? Adjusted for inflation, the overall, inflation-adjusted price of clothing has fallen by 28% since 2000, so you’ll save money on your summer vacation wardrobe this year compared to a vacation in 2000.
7. Amity also complained about the cost of a haircut today — $45 — compared to supposedly only $20 in 2000, a whopping increase of 125%. But the CPI for Haircuts shows a 2000-2014 increase of only 36.2%, almost exactly matching the 37.5% CPI increase during that period. And compared to the 47.2% increase in wages over that period, a haircut today is cheaper than it was in 2000, measured in the amount of time (hours) working to earn enough income to pay for a haircut.
8. Another of Amity’s “price zaps” was the 100% increase in movie ticket prices from $5 to $10 since 2000. But again, the CPI series for “Movies, Theaters and Concerts” show an increase of only 45% since 2000, just slightly above the 37.7% rate of overall consumer inflation, and slightly less than the 47.2% increase in nominal wages over this period. Further, there are lots of options today for watching movies in your hotel room, including purchasing movies through the hotel, and watching movies on your computer with DVDs or through Netflix, options that are probably much cheaper today. For example, the CPI series for “video disks and rentals” has fallen by 39% since 2000 (see table above).
9. It is true that the cost of college tuition and college textbooks, and the price of postage stamps, have all significantly increased since 2000 by more than inflation (real increases of 65.7%, 59.1% and 7.9% respectively). But those goods and services are heavily influenced by government funding and financing (student loans) in the case of college tuition and textbooks, and in the case of postage stamps, provided by government monopoly. In contrast, the CPI for “recreational books” has fallen in real terms by 8% since 2000, which helps to illustrate that when a good is provided in market setting (recreational books) the cost falls over time in real terms. Once government funding and/or financing are introduced, distortions take place that have fueled cost increases in college tuition and college textbooks far above overall consumer price inflation.
Conclusion: Where does that leave us in our comparison of a vacation today versus 2000? A lot of the main components of a vacation are cheaper today in real terms: airfare is 16.5% cheaper and hotel lodging is cheaper by 10.4%. The electronic devices (cell phones and laptops) associated with planning a vacation and their costs of operation (monthly cellphone plans and Internet access) are all much cheaper today, as are the costs of buying or renting movie DVDs or streaming live movies. Food prices have increased slightly more than overall consumer inflation since 2000, but about the same as nominal wages. On the other hand, clothing is much cheaper today by 28% adjusted for inflation compared to 2000, and vacation reading materials are cheaper today by 8% (recreational books). The price of haircuts is about the same, and movie tickets are more expensive than in 2000. Gasoline is more expensive than in 2000, but cars today are cheaper, more fuel efficient, and more durable, reliable and safer. College tuition and postage stamps are both more expensive today, but that’s largely because of a government monopoly for first-class mail, and government funding and financing of higher education.
Bottom Line: Comparing nominal prices in 2000 to prices today tells us nothing until we compare those price increases to overall inflation or wages. Once we make those adjustments, and account for all of the goods and services associated with vacation travel, I would say that taking a vacation today is probably cheaper than in 2000 based on the “micro” analysis above. And I would have to agree with Jimmy P’s conclusion from his “macro” analysis that Amity Shlaes is dead wrong about inflation in general and “vacation inflation” in particular. Finally, we should all ignore statistical cranks and conspiracy theories about biased government reporting of inflation.