Inflation quietly burns a hole in Americans’ pockets

The Bureau of Labor Statistics reported this week that inflation moderated in January, but a closer look at the data reveals alarmingly high costs that are still burning a hole in Americans’ pockets.

The annual consumer price index (CPI) fell to 3.1% from 3.4% in December, inching ever so closer to the Fed’s 2% target.

That looks decent on the surface, but consumers paid a lot more for electricity, auto insurance, steak, juices, baby formula, medicine, laundry, cable TV, car repair, and haircuts, just to name a few.

Prices on every single one of these items outpaced headline CPI by a wide margin. For example: Juices and drinks were up 29% year-over-year, auto insurance jumped 20.6%, and non-prescription drugs rose 9.1%.

Shelter costs grew at double the rate of headline CPI, with rent increasing by 6.1% and homeowner inflation climbing by 6.2%.

Eating out at a restaurant is also much more expensive, with the “food away from home” category climbing 5.1% year-over-year.

Compared to January 2023, the average U.S. household spent $213 more this past January, according to Moody’s Analytics. Compared to two years ago, Americans are paying $605 more each month for the same goods.

Overall consumer prices remain 18% higher than at the start of 2021, just before the inflation spike began.

“Inflation is generally moving in the right direction, but it’s important to remember that a lower inflation rate does not mean that prices of most things are falling,” according to Lisa Sturtevant, chief economist at real estate agency Bright MLS.

“Rather, it simply means that prices are rising more slowly. Consumers are still feeling the pinch of higher prices for the things they buy most often,” she explained.

Americans are earning more, but they’re also spending more—and in some cases, it’s leaving them worse off than before the pandemic.

Inflation eats away at wage growth, too

The snowball effect of inflation has made it harder for household budgets to stay ahead—even as wage growth remains well above the historic trend.

“High inflation of the past 2+ years has done lots of economic damage,” said Mark Zandi, chief economist at Moody’s Analytics. “Real earnings remain well below what they would have been if not for the pandemic and the Russia war.”

As Creditnews reported in September, Americans really didn’t get a raise in 2022 because inflation outpaced their earnings growth. Adjusted for inflation, real household income fell by 2.3% to $74,580.

Luckily, that negative trend began to reverse in 2023 as inflation dipped below average wage growth.

Even so, Americans remain fearful of inflation and have called it the most pressing problem facing the country. According to a December YouGov poll, 74% of respondents said inflation was a “very important issue.” That’s higher than any other issue.

Inflation sticking around for longer than expected doesn’t just hurt consumers in the grocery aisles—it also means the cost of borrowing will remain higher for longer.

All eyes on the Fed

Following the latest CPI report, investors have all but ruled out the possibility of a March rate cut. That has consequences for how quickly (if at all) borrowing costs will decline this year.

Since the Fed began raising interest rates almost two years ago, financing costs associated with mortgages, HELOCs, home equity loans, credit cards, and car loans have skyrocketed.

In some cases, like mortgages and car loans, interest rates have more than doubled, per Bankrate data.

“Your job security, your portfolio, your debts and the direction of the economy are all subject to the Fed’s influence. As that price of money changes, it ripples out in a lot of different directions,” said Bankrate’s chief financial analyst, Greg McBride.

Some economists worry that still-elevated inflation could force the Fed to keep interest rates higher for longer, giving consumers a double whammy of higher rates and higher costs.

“Elevated inflation means central banks [like the Fed] may have to keep policy rates higher in a way that stretches the capacity of borrowers to repay debt,” wrote Tobias Adrian, director of the IMF’s Capital Markets Department.

Even Fed researchers have flagged “greater consumer fragility” as more Americans struggle to pay down their debts.

The Fed’s policy-setting board will hold its next rate decision on March 19-20.