Inflation rates provide a reasonable yardstick for measuring buyers’ purchasing power. By comparing income growth with inflation, we can determine how well buyers are able to keep up with rising product prices. But, there is something that is perhaps much more important in our ever-expanding (or, nowadays, contracting) economy that is unmeasured. Just comparing inflation with income growth does not allow us to see how well consumers are keeping up with rising numbers of products. And this product proliferation not only impacts consumers’ purchasing power, it has deep impacts all the way up the supply chain to the purchasing power of retailers, distributors, and ultimately manufacturers.
If there is a lot more to purchase, or a lot more stuff that can be incorporated into the products you make, each party in this supply chain needs to have the financial ability to entertain such a large set of choices. Looking at income growth and inflation alone conceals the true nature of spending power. It is not as much about whether or not our incomes today are keeping up with the prices of things we bought yesterday. It’s about whether or not our incomes are keeping up with the additional things we can buy. It’s about whether or not manufacturers’ incomes can keep pace with the exploding set of ingredients they can choose to put into their products, and whether distributors can cost-effectively stock and sell an ever-widening mix of products, and so forth. The rate at which these new things emerge is faster than the rate at which incomes grow – and therein lays the crux of the pricing problem (firm birth data obtained from U.S. Census Bureau and Income data obtained from U.S. Bureau of Labor Statistics):
Even though inflation may be growing at a rate that is in line with wage growth, the burgeoning number of items available to consumers (and perhaps even critical to consumers – just a decade ago there was no anti-bacterial lotion, and yet now you can’t walk 10 feet in a hospital without walking past an anti-bacterial gel dispenser) makes consumers have less spending power.