kenny..."FUBHO, this 1% inflation sure is terrible. LOL!"....
Low inflation rate? Some consumers beg to differ
Updated 11/1/2006
By John Waggoner, USA TODAY
usatoday.com
Ask most economists about inflation, and they'll tell you it's low. Ask the average consumer, and you might get a very different answer.
Sean Taylor, 34, an information technology consultant in Trenton, N.J., ticks off the changes in his bills in the past nine years: property taxes, now $9,000 a year, up 105%; heating oil, $238, up 109%. His wife, Carrie, a state employee, pays $87 a month for health care; nine years ago, it was free. His income varies from year to year. Her salary is $75,000, up from $45,000, or 67%.
"And she's been promoted twice," he says.
Sure, you can get a lot of computer these days for your dollar. And auto prices have scarcely budged. But the cost of several big-ticket middle-class basics — housing, health care premiums, energy, college tuition — have vastly outstripped the overall inflation rate in the past two decades. Those rising prices, combined with flat wages, mean that the typical middle-class life — a house, college for the kids, a secure retirement — is fading for many.
The consumer price index, including food and energy, has risen 2.1% in the past 12 months, according to the Bureau of Labor Statistics (BLS). By most measures, that's low inflation. At that rate, it would take about 35 years for prices to double.
Somehow, though, it doesn't sound quite right to Stacy Harris, editor of Stacy's Music Row Report, a country music news website based in Nashville. "I feel the bite every time I go to a grocery store," Harris says. Food prices have gained 2.6% the past 12 months, according to the BLS.
For some key consumer items, however, inflation has run much higher for much longer.
•College tuition and fees are up 290% in the past 20 years, or about 7% annually. By contrast, the overall consumer price index has risen just 84%, or 3.1% a year, over that period.
•Medical care is up 174%, or 5% a year. Doctor visits are up 137%, or 4.4% a year. Prescription drugs: 178%.
•Energy, up 132%, or 4.2% a year.
Joe Kopf, a salesman in Hilton Head, S.C., ticks off the items in his household that have jumped in price: "Gas, prescriptions, medical bills, home taxes, airfares," he says in an e-mail. "My income is not keeping up with inflation."
In feeling that inflation has drilled a big hole in his middle-class lifestyle, Kopf has lots of company.
"Declining incomes, combined with rapid price growth in key areas — health care, college, energy — are unprecedented at this stage of an economic expansion, says Jason Furman, senior fellow at the Center on Budget and Policy Priorities. "It's moving in the wrong direction."
Why does inflation feel higher to the middle class? In part, it's because of how the government calculates the consumer price index. The Bureau of Labor Statistics calculates the CPI each month with the help of an army of government employees who fan out across the country, compiling consumer prices.
The CPI is weighted by the average amount spent on any one item. Food and beverage, for example, account for 15% of the CPI; housing, 42%.
"The CPI is somewhat of a plutocratic measurement," says Mark Zandi, chief economist for Moody's economy.com. "Spending is dominated by wealthier households."
Higher-income households, for example, spend more on cars, a part of the CPI that has risen 23% in the past 20 years.
The index also adjusts for the increased value of goods, which critics argue understates inflation. For example, if you buy a laptop computer today, you'll pay roughly the same amount you would have three years ago. But your computer will be faster, have more storage and probably a Wi-Fi card, too.
You get more bang for your buck, and the BLS takes account of that greater value. That's one reason the BLS says the price of computers and peripherals fell 0.9% in September, and 14% from September 2005 through August 2006.
Using the BLS methodology means that personal computer prices have fallen about 61% in five years and about 85% since September 1998 — a discount most consumers haven't actually experienced.
Low wages
The other reason inflation seems to pinch more than it should: Wages generally haven't kept up. Median family income — half are higher, half lower — rose 1.1% last year, according to the Census Bureau.
Government figures released Tuesday show that wages and benefits rose this summer at the fastest pace since early 2004. But some economists doubt that those gains will continue (story, 2B).
Over the longer term, the picture is bleak. Real, inflation-adjusted wages are down 1% the past four years and up 6% the past decade. According to the Congressional Budget Office, after-tax income for the middle 20% of all taxpayers has risen 15%, or less than half a percent a year, since 1979. (Those figures are from 2002, the latest year for which figures are available.)
For the middle class, flat wages and rising key prices have delivered a one-two punch. Consider college, regarded as a key stepping stone for low-income people to reach the middle class. Tuition, which was free in many states until the 1960s and 1970s, now averages $5,836 a year at public universities.
Throw in room and board, and the cost jumps to $12,796, up 5.6% from last year. Private college tuition, room and board averages $30,367, up 5.7%. In the past 20 years, even after factoring in inflation, average college costs have nearly doubled.
The cost of entry to the middle class now seems daunting. Consider what a twentysomething college graduate now has to pay or save for basic needs:
•Average college loan debt, for those with college loans: $19,000.
•Assuming college costs rise at a 5% annual rate, that twentysomething will need to save nearly $5,000 a year for 18 years to put one child through college.
•Down payment (10%) for median-price home: $22,750. The median home costs $227,500, according to the National Association of Realtors. A 20% down payment, which would allow the borrower to avoid private mortgage insurance, would be $45,500. Creative new financing for real estate allows many to buy with a low or no down payment — but it adds to their debt.
•Retirement savings: As corporate pensions vanish, people must rely increasingly on their own savings for retirement. T. Rowe Price, the Baltimore mutual fund company, estimates that people with 40 years until retirement and no savings need to save 15% of their income each year. If they wait until they have 30 years before retirement to start saving, they'll need to save 25%.
And that's if they want to replace just 61% of their pre-retirement salary.
Not that dour a picture
Not everyone thinks the middle class is getting hit harder by inflation.
"When the price of food or gasoline goes up, it tends to get a lot of attention," says Brian Bethune, U.S. economist for Global Insight in Lexington, Mass. "People tend to focus on what they buy day to day. At the same time, they're getting great deals on cars and consumer electronics."
Looking back to a golden age of the middle class doesn't wash, says Furman, of the Center on Budget and Policy Priorities. Overall health care is better now, for example, and far fewer people a generation ago expected to go to college.
Nevertheless, consumers are not only complaining about inflation, they're anticipating more in the future. Consumers expect 3.1% inflation in the coming year, according to the University of Michigan's Consumer Sentiment survey.
Broader inflation
"Price increases have moved beyond energy and spread into other parts of the economy — what we call core inflation," such as airfares and package deliveries, says Richard Curtin, the survey director.
In economics, expectations can turn into reality. When consumers expect price inflation, they begin to accept it. That, in turn, often leads to more inflation. Normally, wages rise, too, resulting in a wage-price spiral. The only real cure is a sharp recession, as the USA saw in 1981. With wages flat, however, consumers are going into debt instead, to keep pace with inflation.
"People are stretching their limits more now than I have seen before," says Stephanie Bittner, a credit counselor in Cherry Hill, N.J.
To economists and the Federal Reserve's central bankers, inflation is a force to be feared and combated. It erodes the value of a nation's currency and diminishes a country's monetary stature among other countries.
But those are big-picture worries. To individuals, inflation means an uphill struggle to reach the middle class, or to stay there. It can discourage even the hardest workers.
"Even in my own life, if you look at my expenses vs. my wages, it's negative," Bittner says. |
