I was thinking about Adam Smith as I waited on hold to schedule what would turn out to be the sixth unsuccessful attempt to fix my high-speed Internet service. More than two centuries ago, Smith wrote in The Wealth of Nations: "The real price of every thing, what every thing really costs to the man who wants to acquire it, is the toil and trouble of acquiring it." Smith was trying to explain why the same thing sells for such different prices in different places. But Smith's emphasis on the toil and trouble of acquiring a thing also explains why our current statistical measures of price inflation fail to capture the full cost of a thing or service. If you look at the full toil-and-trouble cost instead of just the price tag in dollars, you can see not only why inflation feels higher than the official measure, but also why it is higher. Smith's 18th-century point of view also reveals the growing do-it-yourself nature of today's corporate cost cutting. And that, in turn, points the way toward an expanded strategy for picking stocks in the current inflation environment.
Dollar Costs Aren't the Whole Story
The measures of inflation that Alan Greenspan and the Federal Reserve use to set interest rates and monetary policy, which are the instruments of the moment for directing the course of the economy, are based on price calculated in dollars. That captures the amount of money that we pay for things. But it doesn't capture another, increasingly important, feature of cost in the current economy: the nonmonetary "toil and trouble" it takes to acquire that thing. As an increasingly important part of their cost-cutting efforts, companies are making consumers work harder and harder to buy goods and services from them. That often results in cost savings to the company, some of which they pass on to consumers. Measured just in dollars, that makes prices lower. But measured by Smith's full toil-and-trouble accounting, those lower cash prices actually disguise a jump in total cost to the consumer.