Costs Are Relative

When we reminisce about the past, we tend to remember how much things cost but we do so without any context.

For example, in 1970 the average price for gas was somewhere around 33 cents.  Today it is around $3.50. This seems expensive. Had prices just risen by the rate of inflation, a gallon today would only cost about $2.74.  Given these data points - where we were, where we are, and where we should have been - it seems gas is less affordable than it used to be.  But that is arguably not the case.

In the chart below, the blue line represents the amount people have spent on energy as a percentage of overall personal consumption over time. 

Source: Ben Carlson citing Thorston Stock

Gas prices have gone up, but people are making more money and using less fuel. Therefore, for the average American consumer, fuel costs are a smaller percentage of the total budget than they used to be.  This is a good thing. 

The same math applies to countless other resources as well.  For example, here is a similar chart looking at groceries.        

Source: The White House

If you ask consumers if groceries were more affordable in 2015 or 2024, my guess is most will say 2015.  Grocery bills were lower back then. But once again, price and affordability are two very different things.  Despite inflation, American consumers today need fewer hours of work to buy the same week’s worth of groceries.

Keep this in mind next time someone gets nostalgic for the good old days. Human progress and innovation have a long history of making the average consumer better off. My bet is that these trends will continue. Gas and groceries will inevitably cost more in the future, but that won’t necessarily be a bad thing.