Does inflation mean we were we better off 50 years ago? - Darcy Ungaro

The economic problems of the 70s may be playing out again today, writes Darcy Ungaro. Photo / 123rf

Darcy Ungaro is a financial adviser.

OPINION

As I look at the older generation, I see that many of their problems from the early 70s may be playing out again today, especially inflation.

We rely on the CPI, or the Consumers’ Price Index, to tell us the inflation rate, which in turn reveals the change in our currency’s “purchasing power”. When the cost of the same “basket of goods and services” rises too much and too fast, some people suffer more than others. Our investments “rise in value” mostly because our currency drops in value. This “feature” persists in most developed countries.

We observe this in New Zealand, too. Our dollar will buy less stuff over time, but as long as we’re earning more money each year and our wealth rises, we tolerate it. So was inflation bad in the early 70s? You can bet your mission-brown corduroy pants it was! In the first four years from 1970 to 1974, the cumulative rate of inflation was almost 40%. A dollar in 1970 would end up buying only 60 cents worth of goods in 1974. There was immense global uncertainty, the price of oil rose fast, and cultural tension was the norm. More relevant to the everyday person, was how expensive things felt.

When one zooms out, it’s getting harder to “unsee” the damage that inflation brings. For many, it feels as though we trade more of our time and energy today, than we did back then, for “the good life”. Even if it wasn’t worse back then, a larger group of people are starting to notice the effects of inflation, and they’re starting to get smart about where it all comes from, too. For good or for evil, we can blame media for the dissemination of this. You certainly can’t blame the education system.

My kid was taught recently in Year 9 that inflation is caused when businesses charge more for their products and services they produce, so workers ask for a pay rise. This simplistic (Marxist?) explanation expands in university to “cost-push” and “wage-pull” inflation models. It’s not entirely wrong, nor is it entirely right.

There’s a growing belief that the “money’s broken”. This phrase, often used by “sound” or “hard” money enthusiasts, suggests governments and central banks are to blame. Through complicated shell games most of us don’t understand, they allow the dilution and debasement of our purchasing power, to achieve their policy ambitions without having to pass the hat around. If your best friend is the central banker, who needs tax, right? Why not both?

There’s angst rising in the squeezed middle class. They’re the ones stuck most, between higher mortgage rates and a rising cost of living.

It shouldn’t cost a day’s pay to take the kids to the movies. We shouldn’t need two parents at work to live an average life. We shouldn’t have to use debt to get ahead.

So, how did all this start?

The US dollar was taken fully off the gold standard in 1971, and after oil deals, withdrawals from conflicts, and higher rates for longer, the decade-long battle with inflation was won. From the early 80′s until now, began the best 50-year period ever to own property and have debt.

Interest rates would rise and fall, but the peaks would be lower, and the troughs lower, too – all the while it was the opposite for property values, which doubled in price every seven to 10 years.

Wealth started to accumulate for those who understood what was going on or who copied others. Currency creation through constantly expanding credit cycles spawned pyramid schemes out of almost any assets that borrowed “money” could buy.

So, 50 years later, unless we send our kids to work, the inflation problem is real. Is it worse though? What we know, thanks to Stats NZ, is that $1 in 2020 is now worth around 83 cents in 2024 (a $1 million home in 2020, is really only worth $830k today). This is pretty bad, but it’s not worse.

So in the end, it might all come down to perspective. We’d all appreciate the lower prices of the early 70s, but not without our Spotify playlists. We’d love the classic cars we could fix ourselves, but not their outdated performance. Sure, kids could watch TV without much supervision back then, but with only two channels, you were stuck believing whatever was broadcasted.

Maybe fixing the money really will fix the world, or maybe exponential tech-infused renewable-energy-powered robots make things infinitely cheaper instead. It’s hard to say the 70s were indeed better, or that living today is harder than it was back then, so we’ll have to be content with the fact it’s just … different.