Does Ben Bernanke ever buy gas? Or shop at the supermarket?
If he did, the Federal Reserve Chairman would probably know that a lot of everyday items have gotten more expensive lately. Yet the Federal Reserve—whose primary job is to control inflation, along with unemployment—isn't worried at all about rising prices. If anything, the Fed is worried that inflation is too low, not too high. "Measures of underlying inflation have been trending downward," the Fed reported in its latest update on the economy. "Longer-term inflation expectations have remained stable."
[See why you might be better off than you think.]
The Fed, of course, is technically correct. The overall inflation rate is just 1.5 percent, and not long ago, it seemed like deflation—a more pernicious problem than inflation—might be the Fed's biggest challenge. But the Fed's views don't entirely reflect the real world. For many consumers, inflation is in fact considerably higher than the Fed and many economists make it out to be.
The first reason is gas prices, which have an outsized effect on the psyche of consumers. Few goods gyrate as wildly in price as gasoline, which peaked at $4.05 per gallon in the summer of 2008, plunged to $1.60 six months later, and now stands at about $3.10. With prices posted on practically every corner, gas represents a totemic index of consumer attitudes: confidence rises and falls in inverse proportion to pump prices.
It's not just a psychological effect, though. Gas is a staple item for many people, so when the price goes up, it's hard to save money by buying less of it; people need to commute to work and drive their kids to soccer practice, no matter the price of fuel. And it turns out that the cost of other must-have items has been rising as well. Many of the items getting cheaper, meanwhile, are conveniences that are nice to have, but possible to live without.
The government measures the cost of more than 200 items every month when computing the consumer price index, which is the official gauge of inflation. To determine how inflation affects overall business conditions, economists often measure "core inflation," which excludes the prices of volatile items like food and energy. But to measure the effect on consumers, that makes no sense, since most people can't eliminate food and energy expenditures from their monthly budget. Food and energy, in fact, are major expenses for a lot of people, and for lower-income people more than others.
[See why baby boomers are bummed out.]
To measure the effects of inflation on ordinary people a bit differently, I used government data to determine price increases for things that are essential, and for things that are merely nice-to-have. These are my own designations, and some categories, like toys or pet food, could arguably be labeled as either. But overall, the must-have items are things people can't do without, while the nice-to-have items are much more discretionary.
Since the beginning of 2007, the overall CPI has risen by a very low 8.3 percent, which equates to an annual inflation rate of just over 2 percent. Over the same time, wages have grown by 7.9 percent, which indicates that the average worker is not quite keeping up with inflation. Here's how the prices of a variety of goods and services have changed over the same time period:
Price increases for must-have items
Gasoline: 32 percent
Water, sewer, and trash services: 24 percent
College tuition: 24 percent
Eggs: 19 percent
Butter: 18 percent
Cereal: 16 percent
Funeral expenses: 16 percent
Public transportation: 16 percent
Child care: 15 percent
Medical care: 14 percent
Car insurance: 14 percent
Car repairs: 14 percent
Food, overall: 12 percent
Rent: 9 percent
Household cleaning supplies: 9 percent
Household energy: 7 percent
Milk: 7 percent
Fruits and vegetables: 7 percent
Housing, overall: 5 percent
Clothes: 1 percent decline
[See who will prosper in 2011.]
Price increases for nice-to-have items:
Pet food: 22 percent
Airfare: 21 percent
Dry cleaning: 13 percent
Chicken: 13 percent
Restaurant meals: 12 percent
Cable TV: 7 percent
Movie tickets: 6.3 percent
New cars: 1.2 percent
Sporting goods: 0.5 percent
Major appliances: 0 percent
Hotel rooms: 3.5 percent decline
Tools: 4 percent decline
Furniture and bedding: 6.5 percent decline
Toys: 21 percent decline
Computers: 35 percent decline
TVs: 61 percent decline
[See how U.S. consumers are conquering debt.]
Here's what the numbers reveal: Many things are falling in price, especially electronic items that are made cheaply overseas. That helps keep overall inflation very low. But people strapped for cash aren't buying a lot of laptops, flat-screen TVs, or iPhones. They're probably not taking advantage of relatively low prices on new cars or furniture either, buying used instead or just holding on to what they've got. Flat prices on major appliances are a nice break for consumers—but only if you can come up with $400 or more for a new dishwasher or refrigerator.
Many of the things that poor people must buy, meanwhile, are going up in price the most. It's possible to cut back on food and energy consumption, but not by a lot. Paying the rent usually isn't an option. Working parents can't leave young kids unattended, so the rising cost of child care eats up a growing chunk of their pay. Parents wanting the best for their kids have to come up with tuition payments somehow. And nobody can forestall death—or the rising cost of paying for it.
Everybody gets a break from price declines in a few categories, like clothing and toys. But the inflation gap is a genuine problem for Social Security recipients, other people living on fixed incomes, and anybody hoping for a raise. Overall inflation has been so low lately that there will be no cost-of-living increase in Social Security payments this year, and many other types of payments linked to inflation will remain flat as well. Employers love to point to low inflation to justify puny raises, or even salary cuts. But if raises or cost-of-living adjustments were indexed to things that every worker must buy—like food or healthcare or transportation—they'd amount to 3 or 4 percent per year.
[See how we're learning to be happy with less.]
It's even possible that inflation is lower for people with more money, and higher for people with less. If you have enough money to splurge on TVs, computers, furniture, and a new car every few years, then the inflation rate for the basket of goods you purchase may be very close to overall inflation—which is close to historic lows. But if you can only afford to pay for basics like food, rent, utilities, and gas for your old jalopy, your personal inflation rate could be three or four times higher than the official one. Try explaining that to your boss when it's time to ask for a raise.
Twitter: @rickjnewman
Reader Comments Read all comments (6)
Jean-Francois Morf, Charrat, Switzerland 3:58AM February 16, 2011
The John of NJ 9:45AM February 12, 2011
richard of SC 2:33AM February 12, 2011