Yandle: Inflation goes south but consumers still can’t escape its pain – Daily Independent

Bruce Yandle

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By Bruce Yandle | Distinguished Adjunct Fellow, Mercatus Center at George Mason University

Inflation has eased significantly from a year earlier, and some prominent forecasters say the outlook is good for even lower levels in the coming days. But strangely enough, consumers are still very worried about high prices, especially for things they have to buy.

Consider this apparent contradiction. Wells Fargo Economics expects consumer price index inflation to register 2.9% this year and 2.5% in 2025, compared with 4.1% in 2023.

The Wall Street Journal Economic Panel calls for about 2.3% in 2024 and 2025. In theory, consumers agree. The latest University of Michigan survey of consumer sentiment shows that they expect lower future inflation, which is exactly what the Fed and pretty much everyone else is aiming for. But the same survey shows that consumers are simultaneously worried about higher prices in the future.

Let’s try to make sense of it.

The consumer price index and the Fed’s preferred personal consumer price index may be heading south, but the prices of high-spending items in the family budget are heading north, largely due to the effects of past inflation. It turns out that inflation is a difficult, long-term task.

As MIT economist Christine Forbes says: “[F]from a household perspective it is not so successful. Many of them took a big hit on their wages. Many consumers feel that the basket of goods they buy is now much more expensive. If in doubt, I believe we should trust individual users to know how they are doing. The White House and other economists’ goods are broad-based data, but broad measurements don’t show exactly what’s happening to individual family budgets.

So what are the inevitable price increases that put a dent in these budgets, and how do they compare to past inflation?

First, consider the auto insurance required by law if one will be driving. That’s 18.6% more expensive than a year ago and 47% more than the pandemic in 2020. Inflation has also pushed up the price of cars, meaning more policy is needed to cover losses. Yes, gas prices are falling, but insurance prices are more than eating up the savings.

Then there’s homeowner’s insurance, required by anyone with a mortgage and considered vital by almost everyone else. Interest rates rose 23% in February from a year earlier, and for good reason. Inflation has taken a toll on the market value of homes, and more insurance is needed to cover losses. As wildfires and hurricanes deplete insurance companies’ reserves, expect rates to soar.

Finally, there is one last inevitable price increase facing property owners, no matter where they live. Rising state and local property taxes are another blow. As we all know, you can’t avoid death and taxes.

According to U.S. city and county property taxes paid by individual families nationwide, they are projected to rise 6.9 percent in 2024 — nearly three times the annual rate of inflation reflected in September’s consumer price index. In 2023, according to data from the Federal Reserve, taxes increased by 7.2% compared to 4.1% inflation. If local governments are raising prices now, they were better neighbors in 2022, when taxes rose 6.9% while CPI jumped 8.0%. But to taxpayers, what does it matter when the bill keeps growing?

Perhaps you own a house that has increased in value with inflation and you can take out a loan on the property to help finance the family budget. If you are lucky enough to have a decent retirement portfolio that is now worth more, you may be able to draw on it. Car buyers can settle for smaller, older and cheaper models. But none of these suggestions are very attractive or even practical. Each would leave you a little worse off than you are today.

Yes, CPI looks under control, but that doesn’t mean prices are under control, especially on expensive items we need to buy. Inflation is indeed a difficult task. Hopefully the Federal Reserve and our next president and Congress have learned their lesson and will heed the early warning signs next time.

Editor’s note: Bruce Yandle is a distinguished fellow at the Mercatus Center at George Mason University and dean emeritus of the College of Business and Behavioral Sciences at Clemson University. Reader reactions, pro or con, are welcome [email protected].