People’s negative assessments of the economy continue to be somewhat of a mystery. The recent run-up in gas prices and inflation more generally is unambiguously bad news, but is this the worst economy ever, as some of the consumer confidence measures have been showing recently? Real income for those at the middle and bottom has generally been rising by standard measures, so it seems that we’re missing something, and I’m not sure any of us have figured out what. 

My friend, Jared Bernstein, argues that a big part of the story is that consumers are unhappy not just because of inflation, but because prices are high. Implicitly, they expect them to come down and are unhappy that they don’t. I’m not entirely happy with this story, primarily because I remember the 1980s. Back then we had a big surge in inflation in the 1970s, which was brought down by a severe recession (actually two recessions) from 1980 to 1982.

But prices never actually fell; we just got the rate of inflation down from peaks of more than 10% to around 3-4%. And most people seemed happy, or at least they told survey takers they were happy. 

I will come back to this issue. I think there might be something to the prices are high complaint, but maybe in a somewhat different way than Jared has laid out. I do think we need to consider the possibility that people don’t see inflation in the same way economists measure it. 

I’ll address two areas where I think the Consumer Price Index (CPI) and Personal Consumption Expenditure Deflator (PCE) may miss part of the story. Then I will talk a bit more generally about how we measure inflation versus how it might be perceived by consumers.

Fees Charged to Renters

The Guardian had a great investigative piece this week, by Tracie McMillian, about the fees charged to tenants by the real estate management company Greystar. According to the piece, Greystar tacks a wide range of fees for everything from sewage and trash pickup to access to amenities, even to the cost of processing rent payments. According to a study cited in the article, these fees averaged 20% of rents.

Greystar is just one company, but the piece indicates that it manages approximately 1.1 million rental units across the country. That by itself would be more than 2.5% of all rental units. But the piece indicates that these sorts of fees are a common practice among real estate management companies, even if others may not be quite as extreme as Greystar.

In principle, fees should be incorporated in the measure of rents used by the CPI and PCE, but it’s not clear that they would be fully picked up. The Bureau of Labor Statistics (BLS) sends a survey taker to people’s doors who ask them about the rent they pay. They are supposed to tell them this includes the various fees, but that fact may not always be clearly conveyed. And in any case, tenants often don’t know of some of these fees, so they wouldn’t be able to tell the survey taker about them even if they did understand the question correctly. 

It’s not clear how much of these fees would be missed and how much difference it would make in our measures of inflation, but the two rental components (rent proper and owner’s equivalent rent [OER]for owner-occupied housing) account for just over a third of the weight in the CPI. If we missed 3-4 percentage points of rental inflation in the last five years due to uncounted fees, it would matter for the overall measure of inflation. (The OER index is based on the rent index, so a mismeasurement in the rent index would also affect the OER index.)

This is not the only place where inaccurate prices could affect measured inflation. Last year the Guardian had a piece about how Dollar Stores often charged people more at the checkout counter than the price shown on their shelves. They apparently program their registers to record the prices they want to charge, but they don’t always update the prices on the shelf to reflect increases. 

This can leave many people surprised at the checkout counter when they find their bill is considerably more than what they expected to pay. That’s bad news for them, but it’s also a bad story for our measurements of inflation. The BLS price checker is looking at the price on the shelf; they wouldn’t know if the store had programmed a different price in its system. 

The Dollar store chains are big on their own, but apparently, other chains also have similar issues, even if not to the same extent as Dollar. While part of the story may be deliberate deception, part of it is simply understaffing. The change in the programmed price can be done in seconds. Changing the price on the shelves can require considerable staff time, especially if items are individually marked. If most of the price changes are upward, the failure to accurately record them will lead to an understatement of inflation.  

People Might See Home Insurance in a Different Way than BLS

Most homeowners have home insurance. In fact, banks generally require insurance as a condition for getting a mortgage. According to research from the Dallas Fed, the average homeowner with a mortgage spent $2,700 on home insurance last year, which would come to 2.7% of median family income. That’s up from 2.0% before the pandemic. 

Despite the large and rapidly growing (can you say, “climate change?”) amount that homeowners spend on insurance, its weight in the CPI is less than 0.28%, roughly the same weight as household cleaning products. Home insurance has such a low weight is because BLS is only counting the cost of insuring items in the home, treating it as tenants’ insurance, not the cost of insuring the structure itself.

There is a logic to this decision having to do with treating housing as a consumption item rather than an investment. That’s a longer story, but the simple point here is that every homeowner treats what they pay for insurance as money out of their pocket. And that’s the whole premium, not just the part that covers furniture. This would be another reason that our measures of inflation might undercount the inflation people see in their lives. 

High Prices and Falling Prices

Picking up on Jared’s point about prices being high, it is worth noting that spending on food has been consistently falling as a share of total spending for many decades. In the 70s food spending was around 13% of total spending. That had fallen to less than 10% by the early 90s, less than 9% by 2010, and in 2020, just before the pandemic, it was just 7.6% of total spending. (These data are taken from the relative importance measures from the CPI.) 

Given this longstanding pattern, people might reasonably have expected food to continue to take up a smaller share of their budget. But that has not happened. Food now accounts for roughly 8.3% of the average household’s expenditures. It is understandable that people would be upset about their food budget being a growing burden. And of course, this is a considerably larger share of the budget for people at the bottom and middle of the income distribution than the top. 

I have also noted that the index for medical care likely bears little relationship to what people see as the cost of medical care. The index measures change in the cost of specific items, like a particular drug, or a specific procedure, like hip replacement surgery. 

Few people would have any idea what these procedures cost. They would know what they pay for their insurance, their co-pays and deductibles, and out-of-pocket expenses. Those would be very indirectly related to the rate of medical inflation shown by the CPI. In a period where the government is cutting back subsidies in programs like the ACA and Medicaid, what households have to pay for their care is almost certainly rising far more rapidly than the CPI measure of medical care inflation.

Is It Really the Worst Economy Ever?

I can agree that our measures of inflation might be missing some price rises, but I still don’t think that can get us the worst economy of the post-World War II era. Unemployment almost hit 10% in 2009, and 11.0% in 1982. Are things really worse today when the unemployment rate is 4.3%?

As many have noted, part of this is the hyper-partisanship of the times. Republicans say things are awful when a Democrat is in the White House and vice versa. It is likely that social media is partly to blame, as it seems to amplify negative stories. (When have you seen good news go viral, other than the Knicks winning?) I’d like to say that extreme inequality is part of the picture, but I don’t have evidence to back that up.

Anyhow, it seems we need to keep putting things on the table for consideration. There is a big disconnect between our standard measures of economic well-being and how people tell us they feel about the economy. There should be some way to explain the difference.