The Real Cost of $800

With the price of gold over $800 an ounce, and platinum topping $1,000 an ounce, it’s no surprise the jewelry industry fears the sky is falling. After all, few in the industry can say “1981” without a shudder.

But this isn’t 1981, and $800 isn’t as much money as it used to be. According to the U.S. Bureau of Labor Statistics’ inflation calculator, $800 in 1981 dollars is $1,838.82 today. Or, in reverse, today’s $800 gold would have cost about $348 in 1981. And, no, we’re not in a recession. According to a special report from the Wachovia Economics Group, current conditions warrant concern, but they’re not recessionary. “Economists as a group are fairly optimistic about the economy’s prospects,” writes Mark Vitner, Wachovia’s senior economist. “The latest Blue Chip Economic Consensus Forecast assigns about a one-third chance of a recession during the next year, which is roughly the same odds Alan Greenspan assigned earlier this year.”

Finally, as this column has noted previously—and Vitner also points out—economists have consistently underestimated Americans’ willingness to keep shopping. Since the advent of the general-purpose credit card in the 1970s, we’ve become addicted to immediate gratification, and, starting with the boomer generation, never learned to economize in a big way.

When gasoline started climbing above $2 a gallon, economic pundits predicted Americans would give up their SUVs in droves. Why? Because when gas doubled from approximately 35 cents a gallon in 1972—73 to about 75 cents a gallon at the end of that decade, it was out with the big roomy Oldsmobile and in with the economical Datsun.

But times have changed. Despite prices at the pump—and reports of declining SUV sales—a lot of them are still on the road. Just wait, said the pundits, till gas goes over $3 a gallon!

Guess what? It’s there, and so are the SUVs, many of which have fattened up. Out with the Cherokee and in with the Navigator. Why? Americans want to be comfortable, and we’d rather fork over more money for gas than squeeze into a little car.

We’re not forking over that much more money, either. Gasoline—even at $3—is still relatively cheap. Sure, it’s an adjustment from the $1.65 a gallon it was a couple of years ago, but, using the government’s inflation calculator, 35 cents a gallon in 1973 equaled $1.54 a gallon in 2005—not much less than the actual pump price!

The difference today is how many other things are taking chunks out of the wallet, and that the paradigm of wants vs. needs has shifted. The average space of a new single home in 1975 was approximately 1,645 square feet, according to The Realty Times. In the 1950s, 1,100 square feet was closer to the norm. By 2005, the figure had risen to 2,434 square feet. Most families in the 1950s had one television set, one telephone, and one car. Today, we have multiple TVs, cars, and phones plus microwaves, computers, printers, scanners, VCRs, DVD players, TiVos, digital cameras, cell phones, and iPods. Walk-in closets in some of today’s homes rival the kids’ bedrooms in 1950s-era houses.

Cars, houses, and college educations do cost more relative to income than they once did—and the leveraging ratio for debt is unquestionably higher than it used to be. But that hasn’t stopped people from spending, and many consumer goods cost a fraction of what they once did, relative to income. In the 1950s, a woman of limited means had no choice but to have a limited wardrobe—or, if she could sew, a homemade one. Today, a woman of limited means can fill her closet with just as many clothes as her affluent neighbor—she might be buying hers at Wal-Mart instead of Neiman Marcus, but she’s still buying them.

This is why $800 gold in 2008 is not the same as $800 gold in 1981. Yes, the higher price is a big adjustment, and it does make buying new merchandise a challenge. It will affect your margins if you can’t pass some of the increase on to consumers and will hurt retailers who sell on price—and it will weed out weak businesses. But if your business is solid—or you rethink your strategy and adapt—you’ll be part of an industry that will emerge stronger. And, if you happened to buy a lot of good gold basics before the price went up, you can profit handsomely by repricing to reflect current costs.

Is the sky cloudy? Yes, maybe even a little foggy, but it’s not falling—and it’s not 1981.