To establish this, I took the six components of the CPI which are most likely to be given as gifts: jewellery; books; toys and games; personal care products such as perfume; clothing; and audio visual equipment (which includes CDs, tablet computers and MP3 players). I then measured the inflation rate for these six items, using an equal-weighted geometric mean. And this rate has been negative recently. In the last five years, the cost of giving has fallen 0.6 per cent whilst the cost of living (the CPI) has risen 15.4 per cent. And over the last 10 years, the cost of giving has fallen by 13 per cent whilst the CPI has risen by 30.6 per cent.
In part, this is due to steep falls in gadget prices. Audio-visual equipment prices have fallen 62.5 per cent in the last ten years. And this understates the price drop; ten years ago, you couldn’t buy a Kindle or iPad for any money. Prices of clothing and toys have also fallen more than 20 per cent in the last ten years. Only jewellery has upset the trend, with prices rising by almost 50 per cent in the last ten years, thanks in part to higher gold prices.
This does not mean the overall cost of Christmas has fallen. Prices of other festive goods have risen. Alcohol prices are 20.9 per cent up on ten years ago; prices of Brussels sprouts (the man who called oil the devil’s excrement had never eaten sprouts) are up by 27.7 per cent; and poultry and bacon prices have risen more than 40 per cent. And the electricity you use in having the oven on for most of the day has more than doubled in price.
There are simple reasons why the cost of giving has fallen relative to the cost of other things: technical progress and globalization. Whereas our method of producing potatoes hasn’t much changed in the last ten years, the way tablet computers are made has been revolutionized, making them affordable now whereas they didn’t exist a decade ago. And the shift in production of toys and clothes to low-cost far-east countries has allowed their prices to tumble (though whether the missus will thank you for getting her Christmas present from Primark is another matter).
This, though, is no new phenomenon. Almost 50 years ago William Baumol pointed out that the prices of goods tend to fall over time relative to the price of services. This enables the cost of giving to fall relative to the cost of living.
You might think that these price changes mean the market is telling us something - that we should spend less upon ourselves and more on presents. Herein, though, lies a problem. We are bad at guessing what others want, and so sometimes buy presents which cost us more than their value to the recipient: “Oh, bath salts – how lovely.” Joel Waldfogel of the University of Pennsylvania has estimated that around 10 per cent of the money we spend on presents is thus wasted.
Paradoxically, therefore, price signals are giving us an incentive to behave inefficiently. Whether this is a problem with Christmas or a problem for narrow-minded economics is another matter.
