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QE3 To Widen Gap Between Poor & Wealthy

 

Inflation has been picking up since the recession ended in 2009.  The problem with the CPI increasing year over year with no rise in household incomes is that the standard of living for most Americans erodes every year that incomes do not keep up.  Household incomes are back to levels last seen in the mid-1990s while the cost of necessities has gone up.  This brings us to our article today that examines the nuts and bolts of what constitutes the Consumer Price Index (CPI).  The CPI attempts to measure the changes in price for consumer goods and services.  Overall it did a very poor job of measuring the housing bubble because of the owner’s equivalent of rent metric.  Today, it is understating inflation because of the excess spending on “wants” that occurred in the 2000s has now shifted to spending on “needs” but is being dragged down by the amount of family spending on needed goods.  We will dig deep into this data but suffice it to say that the Fed is creating inflation in items most Americans actually need to live their daily lives and the burden on the poor is actually increasing.

 

Do not believe the talk that inflation is nonexistent

Even a one percent rate of inflation is troubling if incomes are stagnant or falling.  Since the recession has ended inflation has occurred even as measured by the CPI:

cpi year over year

Over this same timeframe, household incomes have remained stagnant and household net worth has fallen close to 40 percent.  Yet there is something more troubling in the actual data.  The inflation rate is actually being understated because Americans have shifted consumption from non-essential goods to actually seeing inflation in things that they actually need.  In the 2000s spending on wasteful items was rampant and much of it came because of the easy access to debt.  Yet with 100 million credit cards being yanked out of the system, this spending has fallen dramatically.  So where exactly is the inflation occurring?

Change in Family Spending: 2007 – 2011

 

family spending and inflation 2012

Source:  The Atlantic

This is a very important chart to examine.  What we find is that family spending has gone up on items that are daily needs.  The biggest change has occurred on medical insurance and rents.  The cost of rents going up has come thanks to the financial system allowing million of properties to be held off the market thus allowing prices to be pushed up as the population grows.  The price of rents going up isn’t a sign that incomes are going up but a troubling fact that Americans have to allocate more of their funding to housing.  Of course, this is hitting working, middle class, and younger Americans hardest who actually do not own a home.

 

Read the rest at: My Budget 360

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