Should prices rise or fall every year?

If every year we become more efficient due to new technology and new production methods, should prices rises or fall, all other things being equal?

Prices should fall. And the truth is prices are falling, but your money is losing value faster.

A box of cereal used to cost 19 cents in 1955, and now costs 379 cents, or 20x more. Yet, during the past 50 years, it has become easier to produce corn because of the internet, increased fuel efficiency, better farm tractorsmore efficient farming methods, and more. In fact, agricultural productivity has almost tripled (USDA).

One would expect a typical farmer could charge one third the 1955 price, or six cents. Then 19 cents would buy three boxes of cereal and $3.79 would buy 63 boxes of cereal, instead of one box. If you inherited 19 cents in 1955, it now buys twenty times less.

Each cent is worth 95 percent less. To provide the same value to a merchant, you need to hand over 20 times as much.

Prices are falling in some areas

In areas without central banks, prices may be falling. Consider an area using gold as money. New inventions streamline and double production. However, gold has a limited quantity and can’t be streamlined as much. So gold becomes more valuable relative to other products.

Imagine, in this area, people have monetary choice and some people use dollars and some use gold. The merchants show two prices for everything. If Federal Reserve more than doubled the amount of dollars, then the dollar price will rise, while the gold price will fall.

If you go to a city popular with international travelers, some stores will list prices in five or more national currencies. If you asked a vendor for the cost of an item, the vendor would reply, “What type of money are you using?” If you asked if prices have been rising lately, the answer would depend on the type of money. The price in Zimbabwe dollars, a recent hyper-inflation example, would be constantly rising, daily if not hourly. Other prices would be more stable, because the money is more stable.

You probably have heard about rising gold prices. Sometimes, the price is falling in one country and rising in another because the prices are a reflection of the value of the currency.

Intentional Devaluation and Higher Prices

Federal Reserve informally targets a two percent increase in prices every year, which is really a two percent decrease in value of the dollar.

As an economics professor, Mr. Bernanke called for the Fed to officially announce an inflation target — say, 2 percent or slightly less. (NY times)

This means even if new internet technology streamlines communications, or cheaper labor in Asia reduces costs, or a revolutionary low-cost energy source appears, Federal Reserve, and other central monopoly banks, will ensure prices rise every year by reducing the value of the currency. When a new invention reduces costs by three percent, Federal Reserve devalues the currency by five percent, for a net price increase of two percent, their target.

Federal Reserve claims the economy needs stable prices so businesses can plan. If businesses can plan for higher prices, then they can plan for lower prices.

Federal Reserve claims people won’t purchase goods if they expect prices to fall, and lower consumer spending will paralyze the economy. People get hungry and can’t wait long for their next meal. They also don’t want to sit at home on the weekend waiting for lower prices. People will spend their money, regardless of the price. And if they spend less, that means they’re saving, a virtue in more rational times.

Change in Perspective

People used to think the sun revolved around the earth. Then they realized it was the opposite. A similar perspective shift is needed with money. Prices aren’t rising, your money is losing value, when the central bank and other banks issue new money.

How do you protect yourself from money devaluation, choose a another product to store your wealth and as a basis for your salary.

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