Inflation’s Impact on S&P Price Return (1871-2010)
By Barry Ritholtz - January 11th, 2011, 9:15AM
We have previously mentioned these terrific long term charts (here and here) from Catherine at Visualizing Economics.
She just updated them to show the impact of inflation on long term returns in giant graph.
When overlayed on the timeline, the differences between real and nominal gains becomes readily apparent:
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Click for truly ginormous chart
Source: Visualizing Economics
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January 11th, 2011 at 9:40 am
So, what would you have paid for a functional 10 MB 8088 IBM-PC and Lotus 1-2-3 in 1943? How does the value equation sort this out?
I’ll take nominal profits, and the expectation of nominal profits any day over any form of loss, even economic ones.
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BR: You are confusing technology adoption cycles + economies of scale with inflation.
See Hackonomics, and Hackonomics, Part Deux
January 11th, 2011 at 9:44 am
Pretty much proves what the Fed, coupled with the deficits don’t matter policy of the last 30 years has done. The result is inflation or currency debasement take your pick. Would be interesting to see the price of Gold in nominal terms superimposed on this.
January 11th, 2011 at 9:49 am
They would be EVEN MORE apparent of a regular scale chart instead of a log scale chart.
January 11th, 2011 at 9:49 am
Any chance you can get her to chart real wages over the same period vs. inflation adjusted wages……..
January 11th, 2011 at 10:17 am
From eyeballing this chart, would I be correct to conclude that the shit is presently flying towards the whirling blades of the fan but yet to hit them?
January 11th, 2011 at 10:30 am
maybe I don’t get it – this industry is complicated (my disclosure) – anyway:
doesn’t this matter greatly – current inflow and expected cash out for survival funds –
imo we are searching for the herd jump point – then corporations can go private – and be done with you parasites on the great squid
January 11th, 2011 at 10:46 am
you know I’ll bet there is a level of share karma going on – buy supporters (soldiers) and all that
January 11th, 2011 at 11:16 am
BR replied to me above:
reply:
No, I’m not. You can’t take inflation and ignore technological advancement or technical obsolescence. While you and others have rightly lambasted the CPI as an inflation measure that ignores inflation, you can’t have it both ways. Technological advancement mitigates inflation via substitution … either replacing A with B or replacing Version 1 with Version 2. You are analyzing prices in a vacuum without putting them into real world context.
Working it backwards in order to make a point above, I asked you and readers to take an important modern day invention and put it out of context where it’s value would be extreme if it existed. The quality of life today is much higher than long ago, yet the improvement is unquantifiable and thus ignored as an offset to inflation. Likewise, homes today are much larger and opulent than the cracker boxes of 1942. If you believe old movies, people happily lived in rooming houses in 1942. Today, only transients and the less fortunate do. Non of this improvement in living standards offset inflation calculations. $100 cell phone bills have no parallel but are considered necessities by many today.
Thus, inflation is a useful short term concept, but lacks much over the long run. All due to technological advancement and changes in living standards. To me, inflation is part of a system of concepts that interact. I by nature see thing as part of interacting systems. A thing or concept that stands alone is an anomaly. The chart above sees inflation as inflation only and makes faulty implications because of its two dimensional perspective.
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BR: That is exactly my point
Technology prices plummet REGARDLESS of what inflation is doing. It is in the nature of the adaptation cycle
January 11th, 2011 at 11:40 am
It appears that secular bear markets (particularly the nominal ones) all end with a nice acceleration in inflation. I’d like to see that explored in the data in a little more detail. I wonder therfore, if the secular bear inspires inflationary policies, or if the arrival of inflation, inspires bullish market trends.
But who cares – we should be getting our stretch of inflation very soon based on my visual take. WooHoo!!
January 11th, 2011 at 12:06 pm
BR further replied:
BR: That is exactly my point
Technology prices plummet REGARDLESS of what inflation is doing. It is in the nature of the adaptation cycle
reply:
————
No, we’re still talking past each other. Over the short run you are correct. Changing prices matter because technology can’t improve instantaneously. Two dimensional analysis works. Over the long run, technology and living standards changes with regularity, making inflation a nebulous concept. To a large extent, inflation is a concept without a useful meaning over the long run. You can find nooks and crannys where the long term doesn’t matter. But it matters a lot in most of the real world.
January 11th, 2011 at 3:36 pm
BR –
“technology” is not just computers, and phones, and TVs, and music, and media.
Andrew Carnegie made his money in “steel technology” and prices plummeted!
You cannot say, “Technology prices plummet REGARDLESS of what inflation is doing”.
Prices CANNOT “plummet regardless of inflation”… isnt that the whole point?
Now we have “housing prices plummet REGARDLESS of inflation”…. how many other exceptions?
Finally, “healthcare” is often one of the biggest positive components of our inflation picture. But this is simply incorrect… modern technology advances life expectancy to levels previously unavailable at ANY PRICE. Drugs replace surgeries with lower side effects and much greater convenience levels — again, previously priceless. Then drugs ALL come off patent in 10-20 yrs and are available worldwide at 1/10th to 1/100th of the patented price. Yet somehow there is “healthcare inflation”…. why?
Makes zero sense.
January 11th, 2011 at 3:38 pm
Oh, and BTW these types of charts — “inflation adjust returns on X” are completely useless.
Q – Where can you get “real” returns? ANS – No where. It is just a silly construct.
The only way to get more “real” returns… is to get more “nominal” returns. This is always and everywhere the same thing. Silly weak thinkers run off and buy gold in 1985 to get “real” returns… only to find it lose 40% of its value over the next 15 years. What is that “inflation adjusted”?
January 11th, 2011 at 4:23 pm
The difference between real and nominal returns gets worse over time. In the deflationary era 1871-1913 stocks did better than nominal prices would suggest. Then after 1980 the difference between real and nominal return widened, which implies that investors in recent years have been fooled by inflation and that stocks are not ask good as they would seem.
January 11th, 2011 at 4:49 pm
This illustrates the easiest path to becoming a $600,000 “millionaire”.
January 11th, 2011 at 11:11 pm
where do you think the DOW will be on Feb. 28, 2011? Tell us by Jan. 12 midnight and win “The Little Book of Sideways Markets.”
http://ilene.typepad.com/ourfavorites/the-little-book-of-sideways-markets-contest.html
January 12th, 2011 at 9:36 am
I think an important date here is 1933 when America abandoned gold. It is really what this graph is showing: the impact of abandoning gold.
January 13th, 2011 at 8:10 pm
curbyourrisk: “Any chance you can get her to chart real wages over the same period vs. inflation adjusted wages……..”
The word “real” in economics means inflation-adjusted. So real wages are inflation-adjusted, by definition. What I believe you are requesting is a chart of nominal wages vs. real wages. Here’s one from VE, but it is from 2007.
http://www.visualizingeconomics.com/2007/11/04/has-middle-americas-wages-stagnated/
If you use your google-fu, you can find more recent charts though.