The inflation spike that started in 2021 has been a devastating phenomenon that has eroded the purchasing power of consumers across the U.S. Many consumers report paying fifty percent to one hundred percent more for grocery items. Other consumers have taken on $700.00 – $1,000.000 new car payments. This is rough for everybody. Yet, when the media discusses inflation, they report inflation around 3%. Why does this seem like a false report?
In this article, I’m going to discuss why consumers perceive inflation as worse than indicated by the numbers reported by mainstream media.
What the Media Say
The media often report on disclosures from regulatory authorities that indicate a lower amount of inflation. At least, that’s what consumers hear. The inflation is based on a short time frame: monthly or annually.
In the Bureau of Labor Statistics January 2024 Consumer Price Index report, inflation was reported as 0.3 percent month-over-month and 3.1 percent annually. Why? The Federal Reserve and Congress typically look at inflation monthly and annually in order to get an idea of whether inflation is either increasing or decreasing at a steady rate that falls in line with their stated goals for the macroeconomy. This allows them to gather data that can be used to make plans to deal with inflation.
What the Consumers Say
In January 2024, consumers were more concerned with how much they are paying for goods and services relative to prices that existed prior to the recent inflationary spike around the middle of the year 2021. According to the U.S. Bureau of Labor Statistics CPI Inflation Calculator, $100.00 in January 2021 has the same purchasing power as $117.90 in January 2024. Therefore, consumers were reacting to a realized inflationary rise in prices at almost 18%. It’s understandable that consumers would balk at the reported monthly and annual inflation numbers. Those numbers don’t help consumers understand how to manage the difference in prices that they are recognizing in their budgets.
Inflation is True… From a Certain Point of View
How can both the media and the consumers be correct in what they are saying, when the numbers reported by each party vary so greatly? Before tackling this part of the conversation, let me present some definitions so that we’re all on the same page.
Accuracy by Considering Both Scope and Calculations
I submit that the discrepancy exists based on the difference between what the media reports versus what consumers feel when they make purchases. Let’s take a look at how the difference in narratives creates confusion. Let’s calculate inflation over a set period of time and compare the measured results to the narratives of both the media and consumers.
I used the U.S. Bureau of Labor Statistics CPI Inflation Calculator to generate the values that are used in the following calculations.
| KEY | |
| Basis Month | The starting month used for the calculation of the dollar differential and inflation amount between this month and the Relative Month. |
| Relative Month | The ending month used for the calculation of the dollar differential and inflation amount between the Basis Month and this month. |
| Relative Dollar Amount | The amount of money it would take to purchase the same number of goods that could be purchased with $100.00 within the Basis Month. |
| Monthly Inflation | The amount of inflation represented by the difference between $100.00 within the basis month and the Relative Dollar Amount. |
| Cumulative Dollar Amount | The amount of money it would take to purchase the same number of goods that could be purchased with $100.00 within the Absolute Basis Month (January 2021). |
| Cumulative Inflation | The amount of inflation represented by the difference between $100.00 within the Absolute Basis Month (January 2021) and the Cumulative Dollar Amount. |
| Inflation Calculations for January 2021 – January 2022 | |||||
| Basis Month | Relative Month | Relative Dollar Amount | Monthly Inflation | Cumulative Dollar Amount | Cumulative Inflation |
| January 2021 | February 2021 | $100.55 | 0.55% | $100.55 | 0.55% |
| February 2021 | March 2021 | $100.71 | 0.71% | $101.26 | 1.26% |
| March 2021 | April 2021 | $100.82 | 0.82% | $102.09 | 2.09% |
| April 2021 | May 2021 | $100.80 | 0.80% | $102.91 | 2.91% |
| May 2021 | June 2021 | $100.93 | 0.93% | $103.87 | 3.87% |
| June 2021 | July 2021 | $100.48 | 0.48% | $104.37 | 4.37% |
| July 2021 | August 2021 | $100.21 | 0.21% | $104.58 | 4.58% |
| August 2021 | September 2021 | $100.27 | 0.27% | $104.87 | 4.87% |
| September 2021 | October 2021 | $100.83 | 0.83% | $105.74 | 5.74% |
| October 2021 | November 2021 | $100.49 | 0.49% | $106.26 | 6.26% |
| November 2021 | December 2021 | $100.31 | 0.31% | $106.58 | 6.58% |
| December 2021 | January 2022 | $100.84 | 0.84% | $107.48 | 7.48% |
The data table above gives a view of the inflation growth that occurred during the year 2021. The Monthly Inflation numbers show how inflation grew from month to month. The Cumulative Inflation numbers show how inflation accumulated over the year, relative to January 2021. The chart below provides a visual representation of the data.
With these numbers, we can see that inflation grows cumulatively over time. The Monthly Inflation data can reveal any trends in inflation, showing monthly changes. The Cumulative Inflation data point represents the actual inflation seen in the prices consumers pay, at that point in time. All relative amounts are tied to the specified Basis Month (see table key). Therefore, in December 2021, the media might report that the previous month of inflation (Nov. 2021 – Dec. 2021) rose by 0.31%. However, at that point, consumers would be paying 6.58% more for goods and services as compared to what they were used to leading up to January 2021, on average. It’s understandable that consumers would question why they are being told that inflation increased by 0.31% when their budgets are being strained at a rate of an additional 6.58%.
Conclusion
Both regulatory authorities and the media report on inflation based upon the macroeconomic concern of controlling inflation in the overall economy. Consumers are concerned about inflation based on the microeconomic stance of managing their individual budgets. The difference in the focus on inflation is what causes frustration on the part of consumers. The larger economy means very little to the average consumer when they’re having a harder time making ends meet. However, Congress and the Federal Reserve use the macroeconomic outlook with a view toward reining in large spikes in inflation, instituting policies that instigate both disinflation and stabilized prices. In the long run, this should benefit consumers. Disinflation can slow the rate of price inflation, but it does nothing with regard to the amount of cumulative price inflation that will remain in the economy. The only way prices can go back down is through deflation. A deflating economy would also be accompanied with another set of problems. Unfortunately, this means that the current baseline of prices will remain at a level that is elevated with respect to their measures before the inflation spike.
Do you think Congress, the Federal Reserve and the mainstream media should also address cumulative inflation? Do you think the reporting is fine as it is? Share your thoughts below.