Inflation by almost any measure remains benign, in the range of 1%-2% over the past year. But this relative tranquility masks huge shifts in relative prices: Durable goods prices have been falling for the past 18 years, while the prices of services and non-durable goods have been rising. We live in a world where inflation and deflation appear to coexist.
This first chart compares the year-over-year change in the headline and core (ex-food and energy) version of the Personal Consumption Deflator, which is generally considered to be a broader and more accurate measure of the prices paid by the great majority of consumers than the CPI (which is narrower and slow to change as consumption habits change). By either measure, inflation is within the Fed's target range.
This next chart shows the level of the three main components of the Personal Consumption Deflator, starting from the end of 1994. I chose that date because that was the beginning of the only sustained period of decline of any component of the Personal Consumption Deflator on record, and as you can see, the durable goods component has been declining steadily every since. It is probably not a coincidence that 1994-95 marked the beginning of China's emergence as an economic and exporting powerhouse. China's dramatic growth, industrialization, and cheap labor have undoubtedly contributed significantly to the decline in durable goods prices over the past 18 years.
The whole world is better off, because incomes have been rising significantly relative to the prices of durable goods. If you use the services sector price index as a proxy for wages, then wages have risen 126% relative to durable goods prices in the past 18 years. This is unprecedented.
Put another way, an hour's worth of work for the average person now buys more than twice as much in the way of durable goods. Billions of people now walk around with powerful computers in their pockets, linked to a global network that gives everyone access to just about all the information in the world, anytime, anyplace. This is prosperity and progress on a massive scale.
No wonder the debate rages over whether we suffer from too much or too little inflation. But in the end, it can't be a bad thing that wages continue to rise while computers, TVs, cameras, phones, etc., continue to fall -- even as they become more and more powerful.