The so-called chart of the century promises a deeper understanding of how President Trump’s trade war could obliterate consumer pocketbooks and upend the economy.
That’s likely why this simple presentation of consumer prices has “made the rounds” at the Federal Reserve, according to Bloomberg. It has long been one of the shiniest objects ricocheting around econ blogs (this one included) and Twitter accounts.
The chart’s creator, American Enterprise Institute and University of Michigan-Flint economist Mark Perry, shows the long, steady divergence in prices between things that can be easily traded, mostly goods, and things that can’t, mostly services.
Perry’s clean presentation, enhanced by AEI designer Olivier Ballou, encourages readers to confront the fundamental tradeoff of globalization: cheap competition from abroad has pushed down prices of televisions and toys, helping keep inflation low even as the cost of education and health care soars.
Here it is. The items in blue, according to Perry, are those that are open to international competition.
Mainstream economists generally agree that globalization contributes to slow price growth. Last year Claudio Borio, a top economist at the Bank for International Settlements in Basel, Switzerland, weighed the evidence and declared in a speech that “one would expect the entry of lower-cost producers and of cheaper labor into the global economy to have put persistent downward pressure on inflation, especially in advanced economies.”
This chart is elegant and efficient, but by expanding it into a messier, wonkier version, we can shed even more light on the phenomenon it highlights.
We’ll start by including every category of spending. Perry chose 15 representative items (plus wages) out of a list of hundreds. Perry used the Labor Department’s consumer price index, but one of our story’s protagonists, the Federal Reserve, prefers to measure inflation with the Commerce Department’s personal-consumption-expenditure (PCE) price index. So we used that.
We also tried to hint at the size of different sectors — thicker lines represent more spending. We colored the lines based on official categories, rather than our assessment of how tradable each good or service might be.
These categories show a similar trend. Most durable goods (brown lines) have become cheaper since the end of 1999. Durable goods are typically used for three years or more, such as furniture, cameras and automobiles. As a category, they are more likely to be traded across borders — and thus the most likely to get pricier should a trade war escalate.
Some nondurable goods (teal lines), such as toys and clothing, are also easy to manufacture cheaply abroad and ship to the U.S. It’s no coincidence that they are among those with the lowest price increases.
Most services (red lines), such as restaurants and health care, are challenging to import and haven’t seen the type of competition that would keep prices low.
We can also go one step farther and calculate just how much each category has contributed to the annual inflation rates watched by the Fed. Durable goods — many of them cheap imports — have been the only category that helped slow price growth. There are a few exceptions, such as the periods in 2009 and 2015–2016 when volatile oil prices sent the prices of nondurables into free-fall.
These cheap international goods haven’t always been helpful. The Fed has struggled to meet its goal of a 2 percent inflation rate since the recovery began.
It’s close right now. If it weren’t for the 0.27-percentage point drag from durable goods in the first quarter of this year (brown bar), inflation would have been at or above 2 percent for the first time since the early years of the current expansion.
And there are signs price growth is accelerating — Thursday’s CPI release indicated that, at 2.8 percent annual growth, prices are rising at their fastest rate in more than six years.
The current trade conflagration could push inflation even higher, especially for durable goods. As Perry and others have pointed out, washing-machine prices declined for years as international manufacturers such as LG and Samsung fought for share in the U.S. market. Then Trump dropped the tariff hammer in January. Washing machines have been growing more expensive ever since.
It won’t just be washing machines. The AEI chart speaks to people because it includes everyday objects like textbooks and toys. In another world, it might also include washing machines. Going to that level of detail for every spending category results in what professionals such as ourselves refer to as “spaghetti,” but that’s never stopped us before. We’ve labeled a few of the outliers.
When trade barriers rise, they hit hardest at the bottom of the chart. The items down there aren’t the biggest part of the economy — look at all the thin lines — but they are often the items consumers interact with most. In those categories, consumers have long been accustomed to falling prices. Combined, those factors mean that these goods are precisely where Americans will first feel the pain of the president’s trade policy.