Inflation’s not that bad—or is it?

For some consumers, hearing "good news" about inflation may feel like they're getting gaslit by news agencies or the government. They may wonder, "If inflation is getting better, why are my groceries and household bills so expensive?"

Experts say that this disconnect between the official data often reported on the news and what consumers are actually experiencing is a result of two factors.

First, many people confuse “inflation going down” with “prices going down,” and the two are not the same, said Steve Wyett, jefe de estrategias de inversión de BOK Financial®. "Lower inflation does not mean prices are going down; it just means prices are going up more slowly."

Take the Índice de Precios al Consumidor (CPI), for example. The index was up 2.7% year-over-year in July, having increased by 0.2% month-over-month. On one hand, that year-over-year figure is only 0.7% over the Fed's 2% target, so some might consider it "not that bad." However, it's important to keep in mind that consumers experience the cumulative effects of inflation, Wyett noted.

That means, each month prices go up, they're going up from an already-higher price. It's similar to consistently gaining more weight. As a result of higher prices building on themselves, consumer prices are 24% more expensive since the start of the pandemic, a Bankrate analysis of Bureau of Labor Statistics data shows.

CPI versus CEX
Moreover, the official inflation numbers reported in CPI and the Índice de precios de gastos de consumo personal (PCE) may not necessarily reflect the price increases that consumers have actually been experiencing, said Chrisanna Elser, financial planning quality assurance specialist at BOK Financial.

En cambio, el Consumer Expenditure Surveys (CEX)-which, like CPI, is tabulated and released by the Bureau of Labor Statistics-may provide a more accurate look at what consumers are feeling, Elser said. That's because CEX, unlike CPI and PCE, is based on households' responses to a quarterly and annual survey, she explained. PCE is calculated by the Bureau of Economic Analysis based on reports from the U.S. Census Bureau and other government agencies, administrative and regulatory agencies, and private organizations, such as trade associations. CPI is based on surveys of retailers, landlords and service providers.

Yet, a downside of the CEX is its lagging nature, compared to the monthly releases of CPI and PCE. The most recent annual CEX report is for 2023 expenditures. The report for 2024 expenditures is expected to be released this September, Elser said.

Still, the 2023 annual CEX report provides insight into the dramatic hits to their wallets that consumers have experienced since the pandemic. For instance, from 2022 to 2023, the money households spent on new cars and trucks went up nearly 32%; on cereals and cereal products, up 19%; and dairy products, up more than 13%.

En comparación, according to CPI, the price of new vehicles only went up 1% from December 2022 to December 2023; cereal and bakery products, up 2.6%; and dairy and related products, down 1.3%.

CEX vs CPI, selected categories' increase from 2022 to 2023

These differences stem from how each report is calculated—CPI, based on the responses of retailers, landlords and service providers, and CEX, based on household responses.

To illustrate, Elser used the example of an electric bill. Even if the rate per kWh stays the same, which would mean no inflation, consumers may still experience a higher bill from the same amount of electricity usage because of increased taxes and other fees that may be wrapped up in the bill, she explained. This higher bill would not be reflected if the electric company were surveyed because their response would be based on the fact that the rate per kWh stayed the same. However, the consumer receiving the higher bill would report a price increase.

Calculating your personal rate of inflation
For consumers, an even more precise way to see how your expenses have been changing is to look at your personal rate of inflation, Elser said. Simply put, this means calculating how much you spend on something now versus how much you spent on it at an earlier point if time. For example, if you pay $2,500 a month on rent now and paid $2,300 a year ago, that means your rent went up around 8.7% year-over-year. You can even do it for your entire household expenses by calculating the percent change of what you spend monthly now versus what you spent a few months ago or a year ago.

Elser gave the following tips for tracking changes in your expenses and budgeting:

• Don’t get into the weeds: It's not necessary to get too nuanced, such as tracking how much you spend on individual food items. "I always tell people to keep it very, very high level," she explained.
• Be consistent: Make sure you keep your categories the same. For example, if you buy fast food and categorize it as dining out, be careful not to categorize it something different, like entertainment, another time. That would skew your data.
• Keep the time range small: Look at the last few months, rather than trying to look back at your spending over an entire year. You may even want to review your spending every week so that you can easily remember why a sudden large increase in a category happened, Elser noted.
• Don’t forget to save: “I tell people, ‘When you look at your budget, savings should be one of the larger categories,'” she said.

Some prices may increase from tariffs, tighter immigration
Meanwhile, CPI and PCE can give consumers an overall look at how prices have been trending most recently on a national level. Plus, it's important to keep an eye on them because they help determine policy decisions like when the Fed will lower rates. For instance, in a press conference following the Federal Open Market Committee's (FOMC) decision to hold rates steady for the fifth-straight time on July 30, Chair Jerome Powell referred to both CPI and PCE in his speech.

As Powell noted, although overall inflation numbers have only changed a little since the start of the year, “the underlying composition of price changes has shifted: services inflation has continued to ease, while increased tariffs are pushing up prices in some categories of goods.”

Wyett expects the prices of goods that tend to be imported into the U.S.-such as toys, apparel and appliances-to rise from tariffs. However, he doesn't expect tariffs to cause an overall large rise in inflation.

Instead, the larger impact to prices may come from tighter immigration policies resulting in a reduced labor force in areas like agriculture and hospitality, he noted. For instance, if some crops aren't able to be harvested, it would reduce supply and thus drive prices up. Similarly, if restaurants and hotels can't operate at full capacity, that could also result in higher costs for consumers.

However, none of this is a given, Wyett added. "We're not absolutely certain that prices are going to go higher, but overall, it also doesn't appear that we're looking at a significant period of disinflation."

In other words, the prices you're seeing now aren't likely to go down much any time soon. However, tracking your expenses and budgeting can help you navigate along the way.