Price Inflation of Everyday Items

When the government reports that the inflation rate is such and such, price changes are based on hundreds of items.  Everything from the price of spices and condiments to the prices of bedroom furniture and indoor plants are included to get a sense of how much a person is getting squeezed.  However, that inflation figure is not a perfect measure for everyone as inflation will never be felt evenly.  A change in the price of cigarettes has no bearing on non-smokers just as the price of public transportation fares has no impact on small town folks.  But both cigarette and public transportation fares are included in the official consumer price index.  The weight given to cigarette and public transportation is based on what an average person in America would be buying.  As an example, college tuition is a significant item for those impacted.  But many adults are not in college or have already graduated or never intend to attend.  The official weight on college tuition and fees is only 1.5% of the consumer price index because 1.5% of all consumer spending in the U.S. is for college tuition in a given year.

The biggest weight in the consumer price index is shelter, which is both tenant’s rent and homeowner’s rent equivalence, making up 32% of the total.   The latter rent equivalence is what homeowners would be paying in rent if they were hypothetically a tenant.  As one can imagine, it would be difficult to compute this subjective cost, so the figures in actuality are largely based on local area apartment rent trends.  And this rent component has been steadily accelerating and is likely to rise even higher over the next 24 months because of falling apartment vacancy rates.  There is still very little new supply that is expected to come on line over the next two years.

The most interesting aspect of the recent year’s inflation rate is that “food prices at home” have been consistently outpacing the broader inflation rate.  The weight of “food at home” is only 7.8 percent of the total in computing the official consumer price index.  However, food shopping is a near-everyday activity.  Unlike furniture, a television set, or airfare, grocery receipts are a daily visible reminder of rising prices and a reminder that something is not quite right about this economy.  Fair or not, most people will probably be thinking that the official inflation rate is understating the true inflation picture.  The cost-of-living-adjustment in 2012 was 3.6 percent for social security check recipients and will likely be 2.5% in 2013, based on the normal long-standing use of overall consumer prices and not based solely on food prices.  However people will be wondering why there is such a low cost-of-living-adjustment when everyday experience (at grocery stores) says it should be something much higher.  One reason for the accelerating food prices is due to drought conditions across the farm land in the U.S.  But in terms of the blame game, the focus will be entirely on Washington, and this everyday inflation factor could play a decisive role in an election year.

Lawrence Yun, PhD., Chief Economist and Senior Vice President

Lawrence Yun is Chief Economist and Senior Vice President of Research at NAR. He directs research activity for the association and regularly provides commentary on real estate market trends for its 1 million REALTOR® members.

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