More than a few Americans -- be they lower, middle or even upper class -- know the feeling:
Their paychecks are sharply higher than a decade ago, yet the income does not seem to buy as much.
If they own a house, they know it is worth much more than when they bought it, but they would be hard-pressed if they had to buy it today. The same goes for the family car.
It's that ol' debbil inflation at work, and the American consumer is getting use to seeing him.
Inflation, however, is egalitarian. It plays not only with individuals and families, but it also strikes hard at American corporations. Economists have been saying for years that those record profits corporations often log are as misleading as the record raise the employe brings home. Both are victims of the illusion of inflation.
Starting this year, under an experimental rule devised by the Financial Accounting Standards Board, many of the nation's companies are required to issue supplements to their regular annual report in an effort to take account of the impact of inflation on their operating income and physical assets, among other things.
Jerome I. Baron, of Merrill, Lynch, Pierce, Fenner & Smith, tabulated the results for 271 companies whose fiscal years ended between Dec. 25, 1979 (when the accounting rule took effect), and Jan. 31, 1980.
On the average, Baron found, when reported earnings for the 271 companies were adjusted for inflation, net operating income (or profits from business activities) declined 52 percent.
At the same time, when a company's assets are valued in terms of replacement cost rather than historical cost, the value of a company's physical asset -- such as machinery, plants and other equipment -- was 42 percent higher than stated in the standard financial statement.
In other words, like the consumer whose paycheck is bigger but buys less, corporate profits are bigger but buy less. And like the home-owner whose house would cost more to buy today than when it was purchased, so too is a 1978 delivery truck more costly to replace today.
"The key conclusion is that after adjusting for general inflation, the returns on investments are substantially lower than those reported by using traditional historical cost financial statements," Baron said.
Suppose, for example, a company has its assets valued at $100 million, using the standard procedure (roughly what the assets cost minus depreciation) and earned $10 million. The company reported a rate of return on investment of 10 percent.
But, if the board averages Baron caluclated approach what really is happening in corporate America, then that $10 million earnings figure shrinks to about $5 million, and the real value of those assets (what the company would have to spend to replace them) rises to about $140 million. The rate of return shrinks to roughly 3 1/2 percent.
The results appoximate what inflation is doing to corporate America, but are far from precise.
No index is perfect. If a consumer spends a higher percentage of his or her income on food than the theoretical consumer represented by the CPI, and if food is rising faster than the average, then that consumer will be hit harder by inflation than the overall index indicates. It works in reverse too.
If the CPI does not mirror the individual consumer perfectly, it stands to reason that it does an even less effective job reflecting the impact of inflation on a corporation.
But the results of the new accounting rule serve to reinforce what many economists have contended for years: Inflation has wreaked the same havoc on companies that it has on most consumers.
"Current profits are overstated, and the depreciation expenses are understated and insufficient to replace a company's existing plant and equipment," Baron says. That is, when a company takes account of the plant and equipment it "uses up" each year to produce goods and services, the sum of those yearly accounting moves do not produce enough income over the useful life of the asset to replace it. It is as if a farmer ate his seed corn.
Companies that have the biggest capital investment -- such as steel, chemicals, automobilies and the like -- are harder hit than companies with little investment.
These are the very companies that supply many of the "good" jobs for American workers. They will be hard-pressed to maintain, let alone upgrade and expand, their facilities in the years ahead.