Email of the day 1
Comment of the Day

February 12 2014

Commentary by David Fuller

Email of the day 1

On household inflation

“Thank you for posting Tim Price's latest letter.

“This passage quoted from James Grant was a bit of a jaw dropper:

"I submit that in a world of technological wonder, prices ought to be weakening: it costs less to buy things because it costs less to make them."

“While the prices of some goods and services may be dropping, on the whole the upwards march in the cost of living in the real world continues without any signs of slowing down. Our household's bills for taxes, school fees, medical insurance, food, home contents insurance, cinema tickets, utilities, transport, air travel and many other things all increased over the last 12 months. Even the cost of the cat's annual check up at the vet jumped last year. Very few things went down in price.

“It is very hard to believe in the possibility of deflationary risk when the rising cost of living is busy educating my household's finances about the realities of inflation. Certainly it could happen, but I am not holding my breath.”

David Fuller's view

Very well said and I agree.  It is the dichotomy that we have lived with for years.  The cost of most things that we need to pay for on a regular basis continues to rise.  It is only the cost of some things that we may replace every several years, such as computers or TVs that have been coming down in price, and/or are providing better value. 

 However, to make matters worse, there is deflation in average salaries paid by many competitive industries.  If a company needs to lower wage costs to remain competitive, it can either move at least part of its operation to a cheaper location, or increasingly, replace many employees with smart machines.  This is the deflation that many financial analysts and economists are referring to.  Moreover, every middleclass worker who is replaced by technology is inadvertently removing a monthly salary tax payment from the state. 

 As investors, we need to look for companies that are profiting from the virtuous deflation.  For instance, by manufacturing goods more cheaply, which they can also sell at low prices in greater volume, earning bigger profits in the process.   

Back to top

You need to be logged in to comment.

New members registration