May 8, 2003
Despite Fed's Concern, Consumers
By JEFF D. OPDYKE and
If the Federal Reserve is so concerned about deflation, why are so many of the everyday costs of life on the rise?
Postage stamps, sporting events, auto insurance, real-estate taxes and even haircuts have been increasing in price in recent years at a faster pace than the official inflation rate. The government's consumer price index has increased an average of just 2.5% annually over the past three years. In the same period, by some measures, cable-TV costs are up 9.1% annually, auto insurance is up 7.6% a year and even movie popcorn is up more than 3%.
Health-care costs, college tuition and the price of heating your home have been rising at far faster rates -- in the case of natural gas, around 21.4% a year.
These increases stand out all the more given that the Fed announced Tuesday that it may cut interest rates later this year in order to stave off even a hint of deflation, or falling prices. That marks the first time in decades that the Fed, typically preoccupied with the risk of higher prices, has publicly worried about deflation.
And yet, says Richard Yamarone, chief economist at Argus Research Corp. in New York, "No matter where you go, no matter who you talk to, prices are on the rise."
How to explain the disconnect? There's no doubt that prices in some areas have held steady or even dropped in recent years. The costs of computer gear, clothing and airfares have generally dropped. Oil prices have slipped. Some car prices have risen, but relatively slowly. And even though housing prices have soared, falling interest rates and refinancings have taken a big bite out of those costs for consumers. That puts more dollars in consumer pockets, offsetting some of the costs that households face.
But in other areas, particularly services, prices have jumped over the past three years. A haircut at SuperCuts has risen nearly 4.6% a year. Homeowners are paying an average of 6.4% more each year for insurance, according to the Insurance Information Institute. An outing for a family of four to the average professional baseball game is up nearly 4% a year, says Team Marketing Report.
Even Pat Jackman, economist at the Bureau of Labor Statistics, which calculates the official inflation rate, says the widely reported numbers understate the rising cost of life from one year to the next. The fact is, he says, "more money is coming out of your pocket."
The discrepancy comes from the way the government calculates inflation. In compiling its consumer-price index, the BLS relies on roughly 80,000 price quotes that flow into its offices every month. The bureau smoothes and adjust those numbers in varying ways to account for improvements in quality, among other things.
For example, the bureau looks at the price of a car today and the price of a similar version of that car in the past. If the car now costs more but comes with a lot of extra features, the bureau may consider that just a minor price increase or even a price reduction. That's because the consumer got a higher-quality product for roughly the same cost. But the reality, of course, is that you're still paying more money for a car than you used to.
"You had to pay more because you can't buy exactly what you did last time," says Mr. Jackman. "It's forced substitution."
The disconnect becomes even bigger when you look at the Federal Reserve's preferred measure of inflation, the personal consumption expenditures index. It's running at just 1% a year on an annualized basis.
For many families, some of the toughest increases to swallow have come in college costs and health care. The average cost of tuition and fees at a four-year private college rose by 5.6% annually over the past three years, according to data from the College Board. Costs for four years at a public college are up an average 6.7% during that time. An annual survey by the Kaiser Family Foundation shows that the average monthly cost for family health insurance coverage is up 8% a year from 2000 to 2002.
Paul Caracciolo Jr., an accountant from Harleysville, Pa., says his haircut just increased 11% because his stylist's landlord is charging more rent. And just Wednesday morning, Ed Bell, a real-estate broker from Denver, was informed that his health-insurance premiums are going up 21%.
Now, budget crises for states and cities are bringing added costs to homeowners, taxpayers and commuters all across the country. While many states and cities were cutting taxes in the 1990s, that pattern has reversed. Fifteen states enacted significant tax increases in 2002, boosting tax revenues for fiscal 2003 by almost $6 billion, according to the Nelson A. Rockefeller Institute of Government, in Albany, N.Y. That marks a significant change from 2001, when just six states enacted $1.8 billion in tax increases.
Six states have boosted cigarette levies; two have raised beer taxes, says the National Conference of State Legislatures. Eleven, including California, Connecticut and New York are exploring sales tax increases. New York City is expected to increase its sales tax by more than 4%. The city's subway fares just jumped 33% to $2 a ride. And rent-controlled apartments are set to get a rent increase of 5.5% to 8.5%.
Homeowners feel the pinch, too, and not just in New York. Corinne Marasco of Kingstowne, Va., saw her property taxes shoot up 30% this year to $4,214. "I was just shocked" at the size of the surge, says the magazine writer.
"It's not deflation I'm worried about," says Diane Swonk, chief economist at Bank One, in Chicago. "The truth is, the Fed will have to start worrying about inflation sooner than it thinks."
Where are the biggest price increases likely to come in the future? Economist Mark Zandi says that prices for manufactured products like cars and clothing will continue to drop until the economy rebounds. Even then, health-care costs may not level off. To stave off costs he recommends reviewing your health-care plan to see if you are taking advantage of the best options for your family.
Updated May 8, 2003
Copyright 2003 Dow Jones & Company, Inc. All Rights Reserved
Printing, distribution, and use of this material is governed by your Subscription agreement and Copyright laws.
For information about subscribing go to http://www.wsj.com