Why Inflation Feels Worse Than What the Government Says – by Chris Cushman

Jennifer Hester |

In 1931 you could buy gas for 17 cents and a stamp for 2 cents.  In 2000, the average gallon of gas cost $1.50 and a stamp was 33 cents.  Today, it seems like prices will rise between me writing this sentence and publishing this blog!!  People frequently ask me why inflation feels worse than the official statistics lead us to believe. 

Inflation is generally measured by the Consumer Price Index (CPI).  There are several versions, but the general CPI measures over 200 categories and is meant to reflect spending patterns of all urban consumers and wage earners. 

Here are six reasons you might feel prices rising quicker than the CPI illustrates:

  1. You might spend more on the items with prices rising the quickest like college tuition or medical care.
  2. You might feel your “needs” rising quicker than your “wants.”  TVs and furniture get averaged in with gas and medicine to produce the final number.
  3. You might live in an area with prices rising quicker than others.
  4. A common CPI version quoted has food and energy excluded, as these things can sharply vary.  This can be painful as those two categories rise and since the long-term trend of both is up, there is more pain than joy.
  5. The pain of feeling a category rise in price is more extreme then the joy of falling prices.  Example: A 50% rise in gas prices crunching your budget hurts more than a 50% drop provides you joy by leaving a little extra money in your account.
  6. An asset you own is falling in value (a negative) as your expenses rise (also a negative).  If you owned a house as housing prices fell then you saw an asset decline as other expenses rose.  The CPI averaged in lower “owner’s equivalent rent” as a housing value measure, along with higher medical care and other expenses.  The CPI then concludes total inflation isn’t high, although you’re feeling the pain both ways.

What should you do to manage your anxiety about inflation? Plan.  Plan on prices rising.  Plan on your expenses rising.  Some people would prefer not to think about such things, but the right response is to plan on this certainty and save accordingly.  The earlier you start the better prepared you will be!

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