Anyone with a pulse knows prices have increased over the past few years. However, understanding what we are being told about inflation can be daunting. The truth is, there is inflation, then there is real inflation.

You Are Being Lied To

Like pretty much everything in life, the experts have muddied the waters to the extent that no one really knows what’s going on. Here are some commonly-used figures for inflation: CPI, PCE, Core Inflation, Core CPI, Headline Inflation, CPI-U, PPI, CPIH, and RPI.

All you really need to know is one of the most-reported figures, Core Inflation, does not include food or energy. Whose idea was that? Anyone who cites inflation figures that leave out utilities, groceries, and gasoline is not telling you the full story. 

Inflation vs. Prices

How is it that we are being told inflation is coming down yet everything is still so expensive? When reporters and politicians share the wonderful news that inflation is falling, most of us hear “prices are falling." That is not the case.

Inflation is a measure of price increases over time. For example, if something costs $1.00 one year and $1.10 the next year, it has an annual inflation rate of 10%. If the following year the price is $1.11, inflation has dropped from 10% to 1%. Woo-hoo! Yet notice the item is still more expensive. Inflation could drop to zero and nothing would get any cheaper.

EGGSTACK RETIREMENT PLANNER

The truth is, once prices go up, they never come back down. If you are waiting for prices to return to their pre-pandemic levels, you are in for a long wait. The best we can hope for is inflation cools to the point where prices no longer spiral out of control.

Real Inflation

We all have our own measure of inflation; something that is important enough to us that it sticks in our brain. When I was in college, it was beer. “Dude, that's like two cases of beer!" Now my yardstick is filet mignon.

Before you peg me for some out-of-touch fat cat, let me to explain. The price of filet sticks in my mind because it’s by far the most expensive thing I buy at the grocery store. The fact that I’m talking about the grocery price and not the restaurant price speaks to my frugal nature. Anyone can prepare restaurant-quality steaks at home with a little practice.

That said, on the rare occasion that we do go out I’ve noticed menu prices for filet have increased dramatically. I recently took my wife out for her birthday, which I much prefer to going out on Valentine’s Day or Mother’s Day. Restaurants are far less crowded on my wife’s birthday because it’s not a national holiday, although it should be (I think).

Getting back to the price of grocery store filet, for years the price held steady at $18 per pound. In the past three years the price has skyrocketed to $30 per pound.

Let’s do a little math. $30/$18 = 1.67. There’s your real inflation: 67%. Spread that out over three years and you're looking at an annual inflation rate of 22%.

This is why everyone is so angry about the economy. We hear how we should be happy that inflation has fallen from 9% to 3%, yet we still can't afford anything. Inflation has been nowhere near single digits. The average American feels beaten up by rampant inflation and is sick and tired of being lied to about it.

Here are some more figures for comparison:

Those numbers average out to a price increase of 48% over three years, which equates to an annual inflation rate of 16%. That's more like it. That feels more in line with what we’ve experienced.

Wage Growth

It probably comes as no surprise that wage growth has not kept pace with inflation. While real annual inflation has been at least 15%, average annual wage growth was a mere 5%. Three years of inflation outpacing wage growth by 3-to-1 has taken its toll.

Conclusion

Any student of the economy will tell you these things are cyclical. There are periods of high inflation and low inflation. There is nothing we can do about it. We just have to hope for the best and soldier on.

This is a time for belt-tightening, for sticking to household budgets and being financially conservative. Make as much money as you can and spend as little as possible. Don’t use credit cards to try to maintain your pre-pandemic lifestyle. Know that there are better days ahead.

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