Inflation Out Of Control? Not Really

Sick of sticker shock at the gas pump and the grocery store, many people have been questioning government statistics that suggest inflation remains under control. “A lot of Americans don’t believe the consumer price index [CPI] is an accurate gauge,” says economist Fritz Meyer. Yet when he explored the data, Meyer discovered that recent increases in the cost of what most families need in fact hew fairly closely to the CPI rate of inflation.

Some have argued the CPI downplays the rising price of necessities—food, fuel, housing—while focusing too much on discretionary spending. Rent and mortgage payments, for example, are among the biggest drains on most U.S. budgets, easily devouring 20% to 25% of many middle-class paychecks. But Meyer found shelter costs have edged up a mere 1.8% during the past year, well below the overall inflation rate of 3.4%.

And though rising food costs have sparked concerns off and on since around 2005, this crucial category, too, has more or less tracked official inflation statistics, Meyer says. During the past year, the price of food climbed at a rate of 4.6%—1.2 percentage points above overall inflation but still relatively sedate. Groceries that cost $100 in November 2010 went for $104.60 a year later. Meanwhile, the price of food consumed away from home edged up just 2.9%.

So if costs for housing and food—which together account for almost half of a typical household’s total spending, according to the latest government tally—haven’t suffered out-of-control inflation, why does it feel like prices are zooming upward?

Meyer’s analysis reveals that costs of clothing, computers, and cars, too, have increased at a rate well below overall inflation, both during the past year and over the long term. But outlays for college tuition, medical care, and legal services have indeed gone up at a rapid clip. “Heavy consumers of those things have obvious reasons to believe the CPI isn’t accurate,” Meyer says. “But it all depends on what you consume most.”

Another pain point is energy. Gasoline costs alone soared 19.7% during the 12 months that ended in November, so people who drive a lot have reason to complain. But how much do gas prices hurt a typical American household? Less than 5% of expenditures go for “gasoline and motor oil,” according to the latest government statistics, with another 4.1% spent on home heating and lighting.

The CPI works on a statistical level because it measures the broadest possible basket of what Americans buy. Because the economy is constantly evolving, prices in some categories will inevitably rise faster than others, so economists watch the index for the big picture. And measured against the historical long-term rate of 3.1% annual inflation, today’s 3.4% doesn’t seem unusually elevated or out of control, Meyer says.