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Inflation trends that helped (and hurt) wallets most

Published: Jan 16, 2014 10:18 a.m. ET


Opinion: Which price changes have had biggest impact on our pocketbook?


Since the financial crisis began 63 months ago, inflation is running at the slowest pace in 50 years.

WASHINGTON (MarketWatch) — Since the financial crisis erupted just over five years ago, consumer prices in the United States have risen at a 1.2% annual rate, the slowest inflation rate since the early 1960s, according to Bureau of Labor Statistics data released today.

Inflation certainly isn’t raging out of control, as many predicted it would when the Federal Reserve and the Obama administration took decisive action to stem the crisis. But inflation isn’t totally quiescent, either.

As the name implies, the consumer price index measures prices paid by consumers at retail. It measures average prices across the country, and gives each item a weighting in the index in proportion to how much the average consumer spends on each.

Inflation that hurt our wallets the most
Owners equivalent rent 24.1% 1.5% 0.35 pts
Rent of residence 6.6% 2.0% 0.13 pts
Food away from home 5.7% 2.3% 0.11 pts
Car insurance 2.5% 4.4% 0.11 pts
Hospital services 1.6% 6.0% 0.10 pts
College tuition 1.8% 4.9% 0.09 pts
Tobacco products 0.8% 7.9% 0.07 pts
New vehicles 3.1% 1.8% 0.06 pts
Meat, poultry, fish, eggs 2.0% 2.5% 0.05 pts
Used cars 1.9% 2.1% 0.04 pts
Physician services 1.6% 2.5% 0.04 pts

For instance, shelter costs consume about 32% of the average consumer’s spending, while food takes about 14%, energy 10%, and health care 7%.

Even with such a low inflation rate, prices of most goods and services are up, at least a little, since September 2008. Some prices, notably for energy and high-tech goods, have fallen.

(If you’re one of those who believes, against all evidence, that the CPI is simply a fiction invented by bureaucrats and politicians, or who thinks that the real inflation rate is somewhat closer to 10% per year than 2%, please stop reading right now. I’ve dealt with your “theories” before. This is the reality-based, non-fiction section of the Internet.

Everyone experiences inflation in their own way, depending on their own spending habits and individual circumstances. Anyone who consumes a lot of medical care, or higher education, has seen a faster inflation rate than average. By contrast, people who drive a lot, or who buy electronics, may have experienced a bit of deflation.

I’ve gone back over the past five years of CPI data (since September 2008) to find out which price changes have hurt consumers’ pocketbooks the most and helped them the most. This isn’t just a matter of seeing which items have seen the largest prices increases, it’s also a matter of how much of each item the typical consumer buys.

A big price decline for something you never buy doesn’t help much, but a drop in something you buy every week, (say, gasoline) does.

It’s not surprising that increases in shelter prices have hurt consumers the most, given that shelter is by far the largest item in the CPI market basket. Those who rent have seen their costs rise by an average of 2% per year, while those who own a house have seen their shelter costs rise by 1.5% annually.

Higher rent prices have added 0.13 percentage points to the CPI, while owners equivalent rent (home owners’ costs) have contributed 0.35 percentage points. Between the two, they contributed 0.48 points of the annual 1.21 percentage point increase in the CPI

Food prices have also risen modestly over the past five years. The price of buying food to eat outside the home has risen at a 2.3% annual rate, contributing 0.11 points to CPI.

As for food consumed at home, it’s a mixed picture depending on which aisle of the supermarket you’re shopping in. Meat and poultry prices have risen at a 2.5% annual rate, adding 0.05 points to CPI. But prices of dairy and of fruits and vegetables have barely budged, and they are a relative bargain compared with the rest of the things we purchase.

Generally speaking, the prices of goods have been rising much slower than the price of services. Goods prices are subject to more global competition, while services are generally produced locally.

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