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Asset price inflation

So when I bought my first iPhone in 2009 for about $500 I thought it was a lot of cash for a phone.  Now the new iPhone X is coming out in a few days and it will cost just about $1,300 -- under the system in which assets are calculated there has been no "inflation" in the cost of an iPhone because the telephone is so much more powerful... Its just that there's a problem with that analysis (i understand how it started)  in fact, your phone doesn't do anything more than the first version (slight exaggeration).  But overall you check your emails, you make your calls...new programs such as WhatsApp and Skype were introduced, but that's just a different way of communicating.  In fact the only real benefit is that images are better, its got a faster processor, which is all good, but to say that the value added is worth an increase in the price of the phone of nearly $800...I find that hard to stomach.  The whole value adjustment (bigger screens for your TV) started in the 1960 when technological breakthrough were introduced -- the best know are radial tires, that increased the life of your tires by nearly 4x -- from 10,000 miles to 50,000 miles.  

The biggest lie has been in the cost of housing, because what is used in the inflation figures is not the prices of houses, no its the cost of housing -- which more often than not uses rental prices as a proxy.  The impact is that house prices in Canada have been on a rocket ship for nearly 20 years



The worst are Vancouver and Toronto which saw, respectively a 2.5x and a 2.0 time increase of the house price (Edmonton and Calgary peaked in 2008).  So in Vancouver house prices rose by 5.14% per annum for 17 years, and 4.16% in Toronto.  Housing is the single largest expense (after vehicles) for most Canadians (lodging represents about 1/3 of a typical family expense) and car prices also have remained "unchanged" because of technological improvement (yet a car is a car, it consumes the same amount of fuel and last about 10 years...).  In 2000 the average car price was around $21,000 today its near $32,000 -- so about 2.5% per annum.  Granted that's only slightly over the inflation level but everybody gets the picture -- (and don't get me started on gas prices).  What is remarkable is that real inflation has in fact been far higher than the "advertised rate" Today taking the inflation rate over the past 17 years (well 16 years and 11 months) we get an annal inflation rate of 1.99%.

Housing is 30% of family expense
Vehicle is 15% of family expenses
Food is 30% of family expenses


Food inflation has been low -- first because in Canada most of it is imported, and globalization has had a major impact on food prices -- so that's one area where its been "good"  -- by good I mean food inflation (ok maybe not in the past two years) has been low.  Price of imported goods have risen, so has replacement (apples for strawberries).  So food price have been a net contributor to the reduction in inflation.

Looking at non-housing related assets (shares and bonds) there too the values have risen to almost unprecedented levels.  Almost all stock pickers now believe that the market (in particular North America) are "well valued"  which means that there's little upside potential.  The reality is that companies are generating unprecedented levels of profitability  -- much higher than in the past, usually because of massive increase in the productivity -- most of these benefits have been paid to management or the owners (shareholders).  It may not be that important but it explains what's going on.  Hearing Trump talk about making America Great again, the reality is that asset owners have never had it better.

So up here in Canada, where as asset prices have risen dramatically wages have been stagnant for nearly 40 years.  In 1976, average wage was $11 per hour, after Canada's CPI inflation index that would represent $24.14 per hour -- which is $3.00 lower than the average wage in 2017... Taking in consideration "replacement and improvements"  Canadian workers ability to purchase assets remains largely unchanged, while the cost of housing has gone up by more than double in Toronto and 150% in Vancouver.

The average Canadian is poorer than he was, because true inflation (that doesn't take in consideration "technological improvements" ) has outpaced their wage earnings.  That feeling of being poorer, its real, when you consider that an iPhone X will cost you $1,300 and sure it does some stuff that you could not do in the past, but not that much -- especially if you consider that the iPhone's price has grown by 14.5% per annum.



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