Is It Just Me?
#205 Year5 Week 13
Dear Friends,
I got up early the other day and decided to drop by the new coffee shop near my home. Two coffees and two muffins cost me $20. Ouch!. I won’t have to go back to work due to this financial hardship, but I was reminded how much more expensive some things have gotten in recent years. The consensus in the media these days that inflation is improving frustrates me. I understand that the rate at which inflation is accelerating is decreasing. However, feeling good about that ignores the cumulative impact of rising costs in the past few years. Also, items we might consider necessities (coffee!!) have been hit much harder than the broad Consumer Price Index (CPI) and weigh heavily on lower-income families. Despite the broad index moderating, reported CPI figures fail to recognize the cumulative impact of rising costs over more extended periods and the overweight burden on the bottom half of earners.
To give some context, let’s consider how inflation has impacted the costs of three items that comprise a substantial part of all our budgets: food, shelter, and driving.
Even though inflation rates may be down, it should be no surprise that food prices continue to soar, and dining out is now a luxury. The Wall Street Journal reported that average Americans spend 11.3% of their annual income on food so this is a big-ticket item in our budgets. Axios reports that the inflation rate for “food at home,” or what we buy in the supermarket, has declined to 1.1% in the past year. Declining inflation is good, but since January of 2021, the cost of “food at home” has risen 21%. Focusing on the declining inflation rate for this critical category ignores the cumulative impact of increasing costs over the last four years. If you dine out occasionally, you probably feel the effects at your favorite restaurant. Restaurant costs have risen faster than costs at the grocery, and in my experience, the food and the service have declined, reducing the appeal of dining out. Then there’s fast food, which lower-income families rely on disproportionately to help stretch their budgets. The chart below suggests inflation at fast-food chains has risen dramatically and impacts lower-income families more substantially.
Inflation has slightly decreased in housing recently, but the acceleration in home prices has been meaningful over the past few years. According to Self Financial, Americans spend 25.8% of their earnings on housing. If you’ve even casually followed the housing market in recent years, you’ve seen how the demand for homes is much greater than the supply, sending prices through the roof. Between April 2021 and April 2022, home values nationally rose 18.8%, according to the Federal Housing Finance Agency. That doesn’t include the impact of rising mortgage rates, property taxes, and other household-related costs. Less is written about the rental market, though one-third of the population lives in apartments. Once again, those who earn less suffer here as apartment rental rates skyrocketed between 2000 and 2023, up almost 20% since 2022 alone. (See chart below). According to Statista, 40% of renters paid gross rent above 35% of their gross income. For these folks, rising apartment rentals can be especially devastating. The number of cost-burdened renters has hit an all-time high. Yes, the rate of acceleration has slowed, but onerous higher apartment rental rates and home prices are here to stay.
The cost of transportation continues to rise. MarketWatch says the average driver spends 20% of their income on driving-related expenses, including insurance, repairs and maintenance, loans, or lease costs. According to the Bureau of Labor Statistics, the CPI for motor vehicle inflation rose 20.3% in 2023 alone, the most significant increase since 1976. Besides the more obvious problems behind the spike - supply chain issues, worker shortages, and rising new and used car prices- car costs have skyrocketed. The chart below shows how average auto claim amounts have doubled since 2020. Cars are more complicated, contain more electronics, and, as a result, are more expensive to repair. If you own a used car, the news is even worse. Used car prices shot up 37.7% in 2021, during Covid, once again laying a far more significant burden on those income earners least equipped to handle it. So much of life in America is tied to driving, another area inflation has hit very hard.
The latest CPI reading told us inflation had dropped to an annual rate of 3.5%, not yet near the Fed target of 2%, but much improved from recent years. That’s worth celebrating. However, the inflation rate tells only a fraction of the story; for the average American, food, housing, and driving costs gobble up nearly half of their annual wages and have risen disproportionately. If we look at inflation from this perspective, the news is not as encouraging as today’s headlines suggest. When we stop to consider the cumulative impact of inflation and better understand where rising costs have impacted us most, we might not feel as good as the headlines suggest - I certainly don’t. I better get used to my $5 medium coffee…
Stay in touch,
brian