Comparing the inflated cost of living today from 1950 to 2014: How declining purchasing power has hurt the middle class since 1950.

Inflation has a subtle eroding effect that impacts entire economies.  In the United States, we have been fortunate to have relatively stable rates of inflation for two generations.  Even in times of high inflation like the 1970s, people were able to adjust unlike places that experience uncontrolled inflation like Argentina is currently facing.  Also, wages rose in tandem which helped buffer the pain of higher costs.  Today however, inflation has eroded the purchasing power of the middle class.  Only when we look at longer periods of time do we see the large impact inflation has on our ability to buy real goods and services.  People found a piece comparing 1938 and 2013 prices on various goods and items to be enlightening.  Since our middle class did not fully emerge until the end of World War II, it might be useful to compare the price of items back from 1950 to where things stand today.  Has inflation had a big impact on our purchasing power since 1950?

1950 living versus that of 2014

It might be useful to first look at a few common items from 1950:

The average family income:        $3,300

The average car cost:                     $1,510

The median home price:               $7,354

These are three very important metrics when it comes to measuring purchasing power in the United States.  Since we consider having a car and a home as cornerstones to a middle class lifestyle, it is useful to look at these figures since we can easily grab these figures from reliable sources.

See below for source data:

average family income

Source:  US Department of Commerce

Then we can see the median home price:

1950 price of homes

Source:  US Census

A Ford car could be had with a price range of $1,339 to $2,262 depending on the model.  Income is an important measure because it gives us an insight into how well families are doing and how much money is being spent on certain items.  So let us derive ratios for each of the items for the 1950s:

Home price / income =  2.2

Car cost / income =         .45 

This is important here.  The typical home cost 2.2 times annual income while a car cost .45 times annual income.  Let us now fast forward to 2014 and see where these things stand:

The average family income:        $51,017

The average car cost:                     $31,252

The median home price:               $188,900

Let us show the data here:

median home price 2014

Source:  National Association of Realtors

average car cost 2014

Household income was pulled from Census data based on what the typical household earns.  Inflation has a subtle way of eroding purchasing power.  Let us pull some ratios here:

Home price / income =  3.7

Car cost / income =         .61

Housing has gotten dramatically more expensive.  The cost of a new car has gone up but not so noticeably when looking at inflation data.  Inflation has largely eaten away at income on other fronts like college tuition and healthcare.  These were much more affordable back in the 1950s relative to overall income.

For example, in 1950 at the University of Pennsylvania annual tuition was $600:

univ of penn 1950

We should run a ratio here as well:

Tuition / income = .18

Let us look at current tuition costs:

2014 tuition

Current tuition is over $40,000 per year.

Tuition / income = .79

This is a massive change.  In 1950, a family sending their child to the University of Pennsylvania would only spend 18 percent of their annual income (if they paid in cash) to send their kid to study.  Today it would consume 79 percent of gross annual income.  Even if we look at net take home pay a regular family in no way could send their child to school without going into massive student debt.

A good portion of inflation over this time has been masked by massive amounts of debt and financing.  Car purchases, mortgages, and college are now financed long-term.  Low rates have masked this erosion but with rates reaching the lower bound of the range, the pain of inflation is now being felt by many households.

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7 Comments on this post

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  1. LiberatedCitizen (@LiberatedCit) said:

    Anyone who shops for food has seen rising prices and shrinking package sizes its very sad how the middle class in America has been systematically destroyed. Unfair trade agreements contributed immensely not only lost jobs but in lost sovereignty. People should know who to thank and also see a couple more things going on.

    Liberal Politicians Launched the Idea of “Free Trade Agreements” In the 1960s to Strip Nations of Sovereignty

    http://www.zerohedge.com/contributed/2014-02-21/liberal-politicians-launched-idea-%E2%80%9Cfree-trade-agreements%E2%80%9D-1960s-strip-nations

    Why The Government Wants To Short Change American Seniors

    Excerpt:

    If President Obama had stood by his initial budget the chained CPI would have eventually impacted every American at tax time. That’s because the CPI is used to determine changes to tax brackets and, under the chained CPI, the thresholds for those brackets would increase at a much slower pace. That means we would all end up paying more in income taxes each and every year.

    http://www.testosteronepit.com/home/2014/2/22/why-the-government-wants-to-shortchange-american-seniors.html

    Most Economically Thriving U.S. Cities Have Greatest Income Inequality

    http://www.allgov.com/news/top-stories/most-economically-thriving-us-cities-have-greatest-income-inequality-140222?news=852508

    February 23rd, 2014 at 2:10 pm
  2. Juan said:

    It’s a shame you only covered those three items. They are big ticket items.
    Some more service points could have been covered: ultilities; water, gas and electric, telecom services landline phone 1950s/now then cell phones now. Not to mention the services we buy now that didn’t even exist then i.e. cable/dish tv, internet service.
    The cost of food, and just to show some perspective the cost of health insurance(which contrary to liberal mythology was not purchased by everyone). Health care costs for the generally healthy were minimal.
    And the most important cost was left out: federal tax!

    February 23rd, 2014 at 8:23 pm
  3. Greg Murphy said:

    This article is comparing oranges to bananas. Cars today should be more expensive today just from an engineering standard. Modern cars have air bags, emissions systems, mileage standards, etc. that did not exist 50 years ago. The same argument can be made for houses. A house 50 years ago had a 30 amp electrical service. Today that comes in at 200 amps. Most homes back then burned coal and had no insulation. Now you have heating systems with 90% thermal efficiency. Please find something better to compare other than cars or home, or at least calculate what it would cost to build today using standards from 50 years ago.

    February 24th, 2014 at 12:42 pm
  4. Edward Knittel said:

    You forgot an important matter. The family income of 1950 commonly came from one wage earner. Now the family income comes from two or more wage earners. So the situation is much worse than what your figures show.

    February 24th, 2014 at 5:08 pm
  5. Charles Fazio said:

    In 1963, I arrived at the University of Arizona with $800 in my pocket – savings from a hard working summer. Out of state tuition, and all fees, was $405 per semester. So I nearly paid cash for the first year!

    The same expenses for my son, an out of state tuition and all fees, at the University of South Carolina, is nearly $40,000 per year. Have you ever saved $40,000 from a “hard working summer?”

    Not incidentally, University endowments have increased dramatically during this time.

    February 25th, 2014 at 8:15 am
  6. MJsand said:

    Greg Murphy – you actually made the author’s point. The point of the article is not the value or quality of the items we purchase today. The point is that the cost of those items has gone up dramatically (and often for good reasons you mention such as improved safety, increased amenities, higher quality, etc.)…but the income we earn has not kept pace with the increased costs. The result is that we spend much larger percentages of our income on those items which causes us to go into debt and ultimately hurts the economy because we can no longer afford to spend on other things.

    April 1st, 2014 at 8:14 am
  7. adam said:

    Regarding the oranges to bananas comment, Murphy is correct. The average new house in 1950 was about 780 square ft. The average now is nearly 3 times than (over 2100 square feet). Also, with regard to tuition, there has been a large shift in how universities are funded. In the 1950s and 1960s a lot of money flowed into universities through the GI bill. At that time, there was an argument that higher education should be subsidized because, in the end, a better educated workforce benefited all of society. This began to change in the late 1980s and 1990s when it was then argued that because college-educated workers made more than uneducated workers, they should pay their own way. Tuition and fees have increased as federal and state governments have reduced university funding. Most universities now receive only a fraction of their funding from government sources. It was much different in the 19502.

    June 5th, 2014 at 10:49 am

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