Inflation declines but CPI understates rise in prices paid by households

San José, CA – On Thursday, July 11, the Department of Labor released the most popular measure of consumer prices, showing inflation continues to decline. The overall Consumer Price Index or CPI actually declined by 0.1% in June as compared to May. The year-over-year rise, from June 2023 to June 2024 was 3%. This was the lowest inflation rate in more than three years.

Average weekly wages for workers went up 3.8% over the last year. Subtracting inflation, the “real” or purchasing power of wages went up 0.8% over the last year according to another report of the Department of labor on Real Wages.

But the CPI does not include two important payments made by consumers. The first is interest payments, which have mainly gone up because of the Federal Reserve, the U.S. central bank, which raises interest rates to try to slow the economy and lower inflation. Mortgage interest rates are near 7% and are the highest in more than 20 years. Credit cards now charge more than 20% in interest on unpaid balances, which is the highest level in more than 30 years.

Adding back higher interest costs, for both consumer loans (student loans, credit cards and auto loans mainly) as well as mortgages, would increase the inflation rate by about 0.7% over the course of the year. This is not much, but enough to offset out the 0.8% gain in real wages.

The second omission is that the CPI does not include insurance costs for homeowners. The CPI estimates the equivalent rent for a house, but this does not include rapidly rising home insurance costs. These costs would add about 0.8% to inflation over the last year, mean that purchasing power for the average household in the United States has actually gone down by about 0.7%. This is only an average, so many would be much worse off, while some would be better off. No wonder surveys show so many people are sour on the economy.

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