Inflation Illusion

Price inflation creates strong illusion of monetary gains that hides the reality of more mundane performance.

47 days (1/25/2010) after its release, Avatar, the sci-fi 3D movie, became America's highest-grossing film of all time. By comparison, this record was not reached until the 286th day for America's next highest grossing movie, Titanic (1997). But adjusted for ticket price inflation using 2010 as the base year, Avatar ranked only 21st, way below the 6th rank of Titanic. The surprising first rank is still occupied by Gone with the Wind, with Star Wars as the close second.

In effect, the 8-fold increase of ticket prices between 1939 (the year Gone with the Wind was first released) and 2010 has dethroned Avatar from any near-term pretension to be America's highest grossing movie of all time.

Looking from current nominal prices, everything denominated in dollars looks rosier and plumper to the beholder. But stripped off the inflation illusion, the reality is much more sobering.

Those who invest in the stock market for the long term would not be amused if they realized that the 27-fold nominal increase in the Dow Jones Industrial Average between the pre-crash 1929 peak and 2009 actually amounts to only a little over 2-fold of real gain over 81 years.

The pre-crash 1929 peak may be the worst time to buy stocks at their highly inflated prices, of course. Over the 30-year period from 1978 to 2008 even after the 2008 meltdown, the real returns to stocks still averaged 4.5% per year. In other words, stocks still top the list of financial investments for their ability to keep up with price inflation.