CBS Marketwatch on Inflation and the Shrinking Dollar

The Incredible Shrinking Dollar
by Irwin Kellner
Tuesday, January 18, 2011




Commentary: Spending power erodes, and Fed may do more damage


I don't mean your wallet, or even its contents. What I am referring to is the buying power of the money it contains.

The consumer price index (CPI) tells the story. As you know, it measures the change in prices of a fixed basket of goods and services that the typical household supposedly purchases every month.

The recent trend of the CPI does not reveal much to worry about. In 2010, consumer prices rose a relatively benign 1.5%.

However, there is more to this story. For one thing, prices in the month of December alone rose a whopping 0.5%. That was the biggest monthly rise since June 2009.

he rise was traceable to an 8.5% jump in energy should not ameliorate our concerns, since we all use energy just like we all consume food.

Besides food and energy, other items in the consumer's basket went up as well, including health care, apparel and airline fares. Few items fell.

Longer term, the buck's buying power has been shrinking for years — indeed, for decades.

In just about every year, the value of the dollar has gotten smaller, the only difference being the rate of shrinkage. In some years it was faster, while in others it was slower.

This was brought into bold relief by a study released the other day by the American Institute for Economic Research (AEIR). It tracked consumer prices over the 20-year period 1990-2010.

During the past decade alone, AEIR calculates that the dollar has lost a thumping 20% of its purchasing power. Since 1990, the overall loss is nearly 30%.

Most prices covered by the study rose, obviously some by more than others.

According to the AEIR, prices increased the most for items that were heavily influenced by government policies or subsidies. These included tobacco, up 378%, college tuition and fees, up 286%, and hospital, nursing-home and adult-day-care services, up 269%.

Many food items are heavily subsidized by Washington. Not surprisingly, most of these had larger-than-average price increases.

On the other hand, prices for apparel, toys, photographic equipment and various items for the home all decreased during this period. The products with the largest declines in prices from 1990-2010 were TV sets and personal computers — both down by 90%.

Needless to say, the AEIR report also takes aim at the Federal Reserve. It points out that since the Fed was created back in 1913, the dollar has lost more than 95% of its purchasing power.

A big chunk of this decline, 70%, has occurred since 1978 — when the Fed was directed by law to conduct monetary policy with a goal that specifically included stable prices.

And as they say in show business, "you ain't seen nothing yet." The modern-day Fed has injected gobs of liquidity into the markets, which will turn into cash once the banks start lending.

This will mean far more money in circulation than goods and services. This is a recipe for a new round of inflation if I ever saw one.

Since wages are no longer indexed to inflation, rising prices will hurt people's buying power, thus depressing consumer spending — the last thing this economy needs.

Irwin Kellner is MarketWatch's chief economist.