Inflation Is Up 3.7%. Unless You’re the One Paying for It.

Inflation rose to 3.7% in September, up from 3.4% in August and above economists’ expectations. Gasoline prices are up more than 34% over the past year, while shelter costs have risen just 3.2%, according to the Bureau of Labor Statistics.

While that’s a big difference, there’s another difference not getting enough attention: the inflation rate you experience may have very little resemblance to the national average. It’s a disconnect that SchiffGold recently explored in its coverage of September’s inflation report.

Consider a 35-year-old living in Chicago with two children under five. He’s renting a three-bedroom apartment, paying for daycare, buying groceries for four, and perhaps looking to purchase his first home.

Now consider a 55-year-old living in suburban Ohio, fifteen years into a 30-year fixed-rate mortgage. His children are grown, his mortgage payment hasn’t changed in years, and he’s not particularly interested in moving.

Both read the same inflation report. Both live in the same economy. But their financial exposure to rising prices couldn’t be more different.

Same Economy, Different Inflation

Let’s put some numbers behind it.

Suppose our Chicago renter pays $3,500 a month for his apartment. His landlord raises the rent 7% when the lease renews. That’s another $245 a month, or $2,940 annually.

Meanwhile, the Ohio homeowner continues making the same $1,500 monthly principal-and-interest payment he’s made for fifteen years. Inflation hasn’t increased that expense by a penny.

Of course, his property taxes, insurance, and maintenance costs can still rise. But the largest component of his housing payment is protected from inflation.

Our Chicago renter doesn’t have that protection. He’s also paying for childcare, an expense the older homeowner no longer faces. A $100 monthly increase in daycare costs for each child adds another $2,400 to his annual expenses.

Between rent and daycare alone, our hypothetical Chicago family is spending $5,340 more annually.

That’s real money. And we haven’t even gotten to groceries.

The Ohio homeowner could face his own inflation pressures, particularly if he drives long distances or heats his home with fuel oil. The point isn’t that renters always experience more inflation. It’s that two households can experience entirely different changes in their cost of living.

The Problem With Averaging Everything

The Consumer Price Index is designed to measure changes in prices across a representative basket of goods and services.

But the average American consumer doesn’t actually exist.

Nobody purchases groceries, gasoline, housing, healthcare, and childcare in exactly the proportions represented by the national index.

Economists Greg Kaplan and Sam Schulhofer-Wohl examined this phenomenon in a Federal Reserve Bank of Chicago study. They found substantial variation in inflation experienced by individual households, even among people purchasing similar categories of goods.

And there’s another complication: how housing inflation is measured.

The CPI doesn’t measure homeowners’ mortgage payments directly. Instead, it uses something called owners’ equivalent rent, an estimate of what homeowners would pay to rent their own homes.

There’s an economic rationale for that methodology. A house is both an investment and a place to live, and CPI attempts to measure the cost of housing services rather than the cost of purchasing an asset. The Bureau of Labor Statistics explains this distinction in its methodology for measuring shelter inflation.

But it creates a disconnect between measured inflation and household cash flow.

Our Ohio homeowner can have an unchanged mortgage payment while the government reports rising shelter inflation. Our Chicago renter can experience a 7% lease increase while the national shelter index rises only 3.2%.

Neither experience is necessarily captured by the headline number.

The Fed Has One Interest Rate

The Federal Reserve responds to inflation by adjusting interest rates across the national economy. But the consequences aren’t distributed evenly.

Our Ohio homeowner has little reason to care whether today’s mortgage rate is 4%, 6%, or 8%. He’s already locked into his loan.

The Chicago renter, on the other hand, may be trying to purchase his first home. Higher mortgage rates increase the monthly cost of buying, potentially keeping him in the rental market longer.

He’s exposed to rising rents and increasingly expensive borrowing costs.

The homeowner, meanwhile, benefits from a fixed nominal obligation that becomes less burdensome in real terms as prices and, potentially, wages rise.

As a SchiffGold discussion of inflation’s winners and losers explains, the effects of rising prices can differ substantially between debtors, creditors, and households with different financial circumstances.

The Fed isn’t necessarily wrong to raise rates. But a policy intended to slow inflation can impose very different costs on households depending on their circumstances.

Two Percent Doesn’t Mean Prices Come Down

There’s one final distinction worth remembering.

The Fed’s longer-run inflation target is 2%, measured using the Personal Consumption Expenditures price index. But getting inflation back to 2% doesn’t mean reversing the price increases Americans have already experienced.

It means prices are still rising, just slower.

A basket of groceries that increased from $100 to $125 doesn’t return to $100 when inflation falls. At 2% inflation, it becomes $127.50 the following year.

Peter Schiff has criticized this distinction in his discussion of the Fed’s 2% inflation target, arguing that consistently rising prices still erode consumers’ purchasing power.

For households with appreciating assets and fixed-rate debt, inflation can be relatively manageable. For households holding cash savings while facing rising rents and living expenses, the consequences can be considerably worse.

It’s part of the broader purchasing-power problem that SchiffGold has repeatedly highlighted. Inflation erodes the purchasing power of money, even when the reported rate is relatively low.

That’s one reason investors consider assets like gold, although bullion’s price can fluctuate substantially and isn’t a perfect short-term inflation hedge.

September’s 3.7% inflation reading is useful for understanding the direction of consumer prices nationally. But it doesn’t tell a city renter whether he can afford another child, a larger apartment, or his first home.

Nor does it tell a homeowner how much his own expenses have increased.

The Fed has one inflation target and one national monetary policy. Americans have millions of different household budgets, and nobody pays their bills with the national average.

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