If inflation is zero, why does my paycheck feel like it’s shrinking?
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Last week we mourned the death of inflation in an obituary, and some of you wrote in to say you saw inflation in your town. There are even rumors that inflation was seen riding shotgun in a white Cadillac driven by Elvis.
One of the comments we got was from Dennis Sedam in Walla Walla, Wash. He had this to say: “Anybody who thinks inflation is dead is living in a dream world and are certainly not living on a fixed income as I am. Someone needs to change the definition of inflation or the criteria for determining it because, believe me, inflation is alive and very well.”
So how can inflation be at zero percent when so many of us feel like our paychecks don’t go as far as they used to?
Mark Thoma is a professor of economics at the University of Oregon. When I told him about the comments from people who said inflation is real for them, he said, “they’re probably right.”
Thoma points out that that some people’s individual inflation rate is not zero. The zero percent rate that was released last week is an average based on the Consumer Price Index, or CPI. The CPI is made up of thousands of different goods and services. But not everyone buys the same goods and services.
For example, take retiree Dennis Sedam. He was born in 1944, so he probably spends a larger percentage of his income on health care than the average person.
“Health care is very expensive,” says Thoma. “It’s rising way faster than the regular rate of inflation.”
So elderly people are going to have a personal rate of inflation that is higher than the national average. And even if you aren’t buying a lot of health care, everything you purchase affects your inflation rate.
Take, for instance, a gallon of milk — one of the thousands of items in the CPI. That gallon of milk may not cost the same in Wisconsin as it does in Walla Walla. And for people who buy lot of milk where it’s expensive, “they will have a personal inflation rate that is not only those goods but local prices that they pay based on their suppliers,” says Pete Klenow, a professor of economics at Stanford.
In other words, just because inflation is at zero doesn’t mean the price of everything has stayed the same. It just means that for the things that have gone up in price, other items in the CPI have gone down to counterbalance the average.
And this doesn’t take into account wages. On average, wages do increase over time. But for many people, especially low-skilled workers and people on fixed incomes, their inflation rate feels very real and very much alive.
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