What’s Driving Inflation?

One of the basic concepts in economics is that things get more expensive over time. But there is a lot of nuance in such a simple idea. Not everything goes up by the same amount, and in fact not everything goes up.

As you can see in the table below, Televisions, toys and furniture have all gotten less expensive over the last 20 plus years,. What makes the cost of some items go up while others go down?

This idea, among others was explored in a new piece by “Jesse Livermore”, called Upside-Down MarketsIn it he said:

Industries that aren’t able to appreciably increase their productivity tend to experience above-trend inflation. They rely on a labor supply whose cost is increasing faster than inflation, but they aren’t able to use that supply any more efficiently to generate output, so they have to pass the cost on to consumers, raising prices at a pace that exceeds inflation as well.

One of the areas that has increased prices faster than the overall economy is colleges, which Livermore says:

Are in the business of selling a prestigious credential, and one of the determinants of the prestigiousness of the credential is a low student-to-teacher ratio. In 1998, it took one professor to teach a college course at a specified student-to-teacher ratio. Today, it takes that same number, by definition.

On the other end of the spectrum are things like sporting goods and televisions, which has seen prices fall due to globalization. Livermore says:

Durable goods industries such as clothing, toy, furniture, and electronic manufacturing are more able to arbitrage differences in international labor costs than services industries such as child care that can’t offshore their production as easily. As a consequence, durable goods industries have experienced less inflation, if not outright deflation.

As we’ve seen over the past decade, inflation is one of the least understood concepts in all of economics. We can’t predict it, can’t control it, and don’t even know for sure where it comes from. Thanks to this brilliant post, I know a little more about this topic than I did yesterday.


Upside Down Markets: Profits, Inflation and Equity Valuation in Fiscal Policy Regimes

This content, which contains security-related opinions and/or information, is provided for informational purposes only and should not be relied upon in any manner as professional advice, or an endorsement of any practices, products or services. There can be no guarantees or assurances that the views expressed here will be applicable for any particular facts or circumstances, and should not be relied upon in any manner. You should consult your own advisers as to legal, business, tax, and other related matters concerning any investment.

The commentary in this “post” (including any related blog, podcasts, videos, and social media) reflects the personal opinions, viewpoints, and analyses of the Ritholtz Wealth Management employees providing such comments, and should not be regarded the views of Ritholtz Wealth Management LLC. or its respective affiliates or as a description of advisory services provided by Ritholtz Wealth Management or performance returns of any Ritholtz Wealth Management Investments client.

References to any securities or digital assets, or performance data, are for illustrative purposes only and do not constitute an investment recommendation or offer to provide investment advisory services. Charts and graphs provided within are for informational purposes solely and should not be relied upon when making any investment decision. Past performance is not indicative of future results. The content speaks only as of the date indicated. Any projections, estimates, forecasts, targets, prospects, and/or opinions expressed in these materials are subject to change without notice and may differ or be contrary to opinions expressed by others.

The Compound Media, Inc., an affiliate of Ritholtz Wealth Management, receives payment from various entities for advertisements in affiliated podcasts, blogs and emails. Inclusion of such advertisements does not constitute or imply endorsement, sponsorship or recommendation thereof, or any affiliation therewith, by the Content Creator or by Ritholtz Wealth Management or any of its employees. Investments in securities involve the risk of loss. For additional advertisement disclaimers see here: https://www.ritholtzwealth.com/advertising-disclaimers

Please see disclosures here.