Economic Perspectives - 07/18/25

The Bureau of Labor Statistics released the latest inflation data this week. With talk still swirling around the potential impact of consumers prices I thought it would be a good time to re-examine the inflation data. Specifically, today's Perspectives section examines the components of inflation that the average consumer most likely cares about the most. Inflation remains on the radar for the average worker as they continue to face the challenge of dealing with the higher prices that result from inflation. This can be seen in the fact that the Bureau of Labor Statistics reported a 0.4% decline in real average weekly earnings (i.e., earnings growth after inflation) in June. This means that price increases outpaced wage increases in June. This is only one month of negative wage growth but worth monitoring.

To understand the impact of inflation on consumers, it is necessary to examine consumer inflation rather than the official inflation results. To illustrate the type of inflation the consumer is facing, I went through the data and identified twenty-seven categories that most likely affect the average consumer. That does not mean that all consumers spend on all these categories. Let us examine the results.

In the graph below, any category with a red bar experienced a year-over-year growth in prices above the Federal Reserve's 2.0% target. Gold bars are categories that experienced increases between 0% to 2.0% and categories in green had negative growth.

As you can see, 18 out of the 27 categories experienced price increases above 2.0%. Six categories had price increases between 0% and 2.0% and three categories saw prices decline.

For working couples with kids, the hit to their paycheck was probably more painful than those without kids as daycare costs rose 5.5%. It was probably worse if they had an infant in daycare. For those families with school-age kids, the encouraging news is that apparel prices declined slightly so back-to-school apparel shopping should be similar to last year. That may not be much, but you take the small savings when you find them. 

One category that may have the most focus from consumers is Food at Home (i.e., groceries). The next graph breaks down the Food at Home category into its major components to shed some light on what is happening with grocery prices.

Even though politicians may be touting how egg prices have fallen from their peak prices, the reality is that egg prices still increased 27.3% compared to June of last year. For the Food at Home category, 11out of the 19 categories experienced a growth in prices greater than 2.0%. Four categories had growth between 0.9% to 1.7% and four categories saw price decreases. People who need their caffeine hit to start their day may want to switch to the caffeinated non-alcoholic drinks given the difference in growth rate!

The graphs highlight the fact that most consumers are probably not experiencing the official inflation rate as the types of goods and services that may be part of their “core” expenses are seeing more price increases above 2.0% than below.  Consumers may shake their heads when they hear politicians or economists arguing that inflation is under control and wonder “what world are they living in?”

In addition to the fact that you do not buy everything that is included in the official inflation rate is the fact that the weighting for the goods and services you buy most likely do not match what is used to calculate the official inflation rate. The standout example of this is the Daycare category. The BLS data shows that the Daycare category makes up less than 1% (0.73%) of the inflation calculation. For many families, daycare costs are their second or third biggest expense. For couples with no kids in daycare the weighting is zero.

Age can also make a difference in your inflation rate. For young adults, it may be rent, or student loan payments may have the biggest impact on their overall inflation rate. For young families it may be rent or daycare. For middle-aged couples with kids, it may be mortgage payments and college expenses while for older couples it may by medical or insurance expenses. The point is that your inflation rate is unique to you, and you are not crazy when you hear or read about the official inflation rate and think “that's not what I am experiencing.” Most people don't even think in terms of a personal inflation rate. Instead, they think about how much prices have gone up and the impact those price increases are having on their life.

The reason we care about inflation is that it can be the force that causes consumers to dramatically slow their spending. This is especially true if expense growth is outpacing your income growth. A consistent pattern of this happening could cause consumers to stop buying certain items because they can no longer afford them due to increases in prices of other “must spend” categories. An inflation problem will impact spending at the lowest income levels first since they have lower earnings to deal with price increases and no additional income that higher income consumers may have (i.e., investment income and interest income). For those lower income consumers that receive government transfer payments to help them make ends meet, any reductions in those payments may result in more reductions in their spending. Since consumer spending accounts for close to 70% of US economic growth any factors that could slow spending are a risk to the economy.

I am not trying to make an argument to ignore the official inflation rate since it does not reflect your inflation rate. The official rate is used in different parts of the economy including monetary policy. When the Federal Reserve is determining with the 2.0% inflation goal has been met, it is using the two official inflation rates (CPI and PCE) to measure whether that goal has been achieved. Some contracts have price increases built in that are tied to one of the two official inflation rates and some sources of income (like Social Security) use the official inflation rate to determine the change in income levels each year. The takeaway from today's article are:

• It would be a mistake to believe that inflation is not a problem for consumers because the official inflation rates are now below 3%.

• When it comes to understanding the impact of price increases on consumer spending, the official inflation rate may not be a good indicator to use.

• You are not crazy when you don't believe the official inflation reflects your person inflation rate.

The data is from the Bureau of Labor Statistics and is as of 6/30/25.