The Real Reason Everything Feels So Expensive Right Now
Sara Parker is a mom in Houston, Texas, who works for a non-profit. The money, which once allowed her to fill a grocery cart, now only covers the bare necessities. The price of a tank of gas has also nearly doubled for her. “We hear that inflation is low, but we don’t even have time to question it because we’re too busy trying to survive,” Parker told Slate. “To me, it’s the worst it’s ever been.”
More than 1,000 miles away in Columbus, Ohio, Saeed Nassef runs a local homebuilding business. The price of construction materials has gone up rapidly in the last few years, and the costs of electricity, heating, and gas have doubled. Nassef says small businesses and their owners in Ohio are suffering greatly from this inflation pressure, including his neighbor, who does flooring for a living and is struggling to keep up with rising costs. “When the costs of his supplies go up suddenly, he can’t immediately adjust prices,” Nassef told Slate. “His customers just won’t be able to pay. So he absorbs the costs himself. Last week, he told me he had no more money in the bank.”
Parker’s and Nassef’s experiences aren’t unique. Americans all over the country are feeling squeezed everywhere from the pump to the grocery store to housing. Despite this, the U.S. government insists that inflation is stabilized and that it’s continuing to come down steadily since its post-pandemic peak. At the end of March, Federal Reserve Chair Jerome Powell appeared to be optimistic about current inflation levels.The delta between the lived experiences of people like Parker and Nassef—struggling to carry on with life as normal—and the assertion from the federal government that inflation is in a reasonable place is a result of how inflation is calculated. What inflation means to low- and middle-income households and what it means to policymakers are two completely different things. Outside of monetary policy, inflation impacts mortgage rates for homeowners, eligibility for school lunch subsidies, Social Security disbursements, and more. It determines policy, benefits, and economic behavior. But because that number is built on a series of methodological judgment calls, they end up shaping the very economic reality they’re supposed to measure.
Put another way: The way the government tracks inflation can actually construct it.
To measure inflation, the government estimates the price of a basket of hundreds of goods and services that supposedly represent everyday expenses for the “average American.” Then, they compare the variation in the dollar costs of those items from year to year. While there are several different indicators, the two main ones are the Consumer Price Index by the Bureau of Labor and Statistics and the Personal Consumption Expenditures Price Index by the Department of Commerce. CPI captures just out-of-pocket spending by households, while the PCE also includes indirect spending like employer-paid health care or government health programs.
Both indicators frequently underestimate inflation, especially for low-income Americans. The measures are created based on total dollars spent. This means that higher-income households, who spend more in absolute terms, have a greater influence on the basket composition. As a result, low- and middle-income households, who allocate a greater proportion of their income to essentials such as food, housing, or energy, are underweighted. For example, Americans in the bottom income quintiles spend at least 33 percent of their income on food, compared to around 8 percent for the highest-income households. But since wealthier households spend more overall, “luxury” or “discretionary” items such as air travel, hotels, or dine-in restaurants receive a disproportionately large weight (about 8 to 10 percent of the CPI), even though they represent a negligible share of the consumption for the lower half of the income distribution.
This imbalance shapes how inflation is felt on the ground for many Americans. Alex Spiel, a teacher in Brooklyn, told Slate that his main expenses are power, gas, food, and rent. “Most people I know rarely spend money on hotels or flights,” he explained. “I feel inflation based on the price of a cup of coffee at Dunkin’ Donuts, or a sandwich at the bodega.” The categories that matter the most for most households carry less relative weight in the index than their daily importance could merit.
The federal agencies which calculate inflation also publish “core” versions of their indices which purposefully exclude items such as food or energy because their prices change quickly. This is done to avoid short-term volatility and better capture longer-term inflation trends. While this is useful for monetary policy, it also means leaving out some basic goods that are the most relevant to American households. In doing so, the measurement deviates from lived experience, especially for cash-strapped Americans who are most exposed by these price changes.
Even when essential goods are included in inflation calculations, they are not always measured in a way that reflects reality. Notably, housing is the largest expense for most Americans and is included in the “core” version of the CPI and PCE. Yet for homeowners, housing costs are not measured through mortgage payments or prices, but through “owners’ equivalent rent,” an estimate of how much they believe their home would rent for. This number is based on self-reported survey data. This indicator has long been critiqued for being too slow-moving and inaccurate. In most cases, if homeowners were to move out and pay rent, it would be much more expensive. Since housing expenses are 35 percent of the CPI, and OER alone 25 percent, even small inaccuracies can significantly affect the overall inflation number.
Since the CPI is used to set federal and state policy or adjust wages, this matters. When a large component such as housing is understated, the resulting inflation number can fail to capture the cost pressures that households such as Parker’s or Spiel’s actually experience. Over time, the gap between measured inflation and real costs becomes self-reinforcing; underestimated inflation leads families to have less pay, less in government benefits, and less ability to consume the goods they need, which worsens their cost-of-living crisis. Meanwhile, there is little transparency and few resources to help people understand how inflation is decided on in the first place or how far-reaching its effects are across the economy.
The BLS also tries to identify price changes by controlling for improvements in product quality for a lot of goods—including computers, internet access, phone plans, and cars—through a process called hedonic price adjustment. For example, if I buy a smartphone in 2026 for a few hundred dollars more than in 2024, but there are updates to the camera or the screen resolution, then part of the price change should reflect the quality update as well as inflation. While this makes sense in theory, it creates some issues. It requires assigning a numerical value to quality improvements, which varies highly by individual preference or income. (For example, I may not care about or really use my phone camera. In fact, maybe I would prefer to spend less on the phone.) Also, it assumes that consumers benefit from these “upgrades” in the first place, even in cases where the product evolution is imposed. As simpler goods are discontinued or disappear from the market, consumers are sometimes compelled to purchase more advanced or expensive options, regardless of their actual value. In that sense, these adjustments may understate the effect of maintaining a given standard of consumption.
Source: SLATE