I’m a “silver lining” person. I try to look for good news, especially during times when there appears to be only bad. We’ve certainly had our share of bad news about prices recently. It seems like almost every day this summer gasoline prices have gone up. It started with the typical increases we see when vacation travel picks up. Then, of course, we’ve all been shocked at the gas pump after Hurricanes Katrina and Rita hit the Gulf Coast.
As we’ve been bombarded with this bad price news, it’s easy to wonder whether there’s any good news on prices. Indeed, as gasoline prices have climbed fairly steadily during the last five years, haven’t they pushed up the prices of virtually everything we buy and consume?
I’m happy to report the answer is a resounding “no.” At the same time that gasoline prices have been rising, the prices of many other consumer products have been falling.
Here’s a partial list of consumer products whose prices have fallen since 2000. The numbers refer to the cumulative price reductions from 2000 to 2005: computers down 47 percent, TVs off 46 percent, toys and VCRs have fallen 27 percent, appliances and cameras are 10 percent cheaper, clothing lower by 9 percent, furniture 6 percent cheaper, new vehicles 4 percent less, and tools and sporting goods off 3 percent.
Almost everything we buy for our homes, drive, or wear, has fallen in price. The price declines are saving the average household more than $700 annually compared to what they spent in 2000.
And the good news on prices doesn’t stop here. It’s also much cheaper to borrow money today than it was at the start of the decade. Thirty-year, fixed-rate mortgages are down 2 percentage points, saving homebuyers $130 monthly for every $100,000 borrowed. Interest rates on automobile loans are lower by 3 percentage points, making $20,000, 36-month car loans cost $30 less per month.
These savings have largely compensated households for the higher gasoline prices they’ve had to pay. This is one reason why consumer spending has continued to roll on, despite the added costs at the pump.
Why haven’t these price declines, and the savings they’ve created for consumers, received more notice? A big reason is that gasoline prices are more obvious. They’re displayed on every major block and intersection, and we constantly see them as we drive to work, school, and shopping centers. Plus, most of us buy gasoline at least once a week, so they’re constantly on our mind.
In contrast, other prices are hidden in stores, catalogs, and magazines, and we know about them only if we’re actively looking for the product. In addition, products such as furniture, electronics, and even clothes are purchased much less frequently than gasoline.
Yet won’t higher gasoline prices eventually work their way through these other products and eventually cause their prices to rise as well? Not necessarily. Although gasoline is a component of most other prices through their impact on transportation costs, their importance is often overstated. The latest data show gasoline costs account for only 5 percent of all spending in the economy.
None of this should be interpreted as minimizing the added burden that both households and businesses face when gasoline prices rise. Clearly, budgets would be in better shape if gasoline prices were lower. But some relief has been afforded by the lower prices and costs for many other products we buy. The “big” price picture indeed looks good.
Michael L. Walden is a William Neal Reynolds distinguished professor at North Carolina State University and an adjunct scholar of the John Locke Foundation.