Inflation, It's back.

It's worse than you think



By DANIEL KADLEC
Monday, April 25, 2005 Posted: 1:58 PM EDT (1758 GMT)




Inflation is back. It's official, and you can blame costlier gasoline and other fuels.

But make no mistake: the tab for common services like a hotel stay and garbage removal are jumping too, as is the sticker price on packaged foods and many other household items.

Companies are finding that they can pass on part of their soaring raw-material costs. Yet inflation--at 3%, about par for a growing economy--is actually worse than it appears.

That isn't widely understood by the millionaires on Wall Street, who were shocked--shocked!--to learn that life is getting more expensive and sent stocks into a brief tailspin.

But most of us have been dealing with stealth inflation for a couple of years.

One underappreciated development: folks have gone so much deeper into hock that even the lowest interest rates in a generation haven't cut their average monthly household debt payments, which are at an all-time high and increasing. As rates rise, that will get worse.

Inflation that you feel but can't see comes in many forms. Real estate prices have gone through the roof, so cash buyers are paying through the nose.

Borrowers are increasingly resorting to floating-rate and interest-only loans, which all but guarantee that they will pay more over the life of their loans.

Officially, though, housing looks like a bargain. Why? The housing component of the Consumer Price Index (CPI) is based on rents, which are tame and in some regions have even fallen.

Retailers like Wal-Mart and Home Depot are quietly replacing common items with more expensive versions, driving up the price of an average basket at their stores.

Think of a plain gas grill replaced by a fancier one for $20 more. Sure, you get a warming tray, but you still pay more to grill your burgers.

Out-of-pocket costs for cars and computers are understated. Last year the average suggested sticker price for a passenger car rose $467, reports the Department of Labor.

But because of improved brake, air-bag and theft-protection technology, which made cars more valuable, an increase of only $386 was built into the CPI in an effort to measure "constant quality," says Patrick Jackman, senior economist at Labor.

Meanwhile, the sense of wealth that President George W. Bush's tax cuts engendered has been overdone. Some of the savings have been offset by rising state and local taxes and fees.

And if you pay the alternative minimum tax, which is rapidly encroaching on the middle class, say goodbye to a big chunk of your federal tax savings.

Finally, we all face soaring health-insurance premiums, deductibles and co-pays as employers shift more of the burden onto employees.

Yet the CPI looks at total expenditures without regard for who is footing the bill. Simply shifting the burden leaves no mark on official inflation.

So, long before Mattel jacked up the price of Barbie and the CPI confirmed rising prices, real people were feeling the sting.

Making matters worse, after adjusting for the cost of living, the average wage in the U.S. has been in a down trend for nearly two years.

For folks making less, even a touch of inflation imposes hardship.

Many on Wall Street are sanguine, saying inflation will cool when the economy slows. But they're talking about official data, not what it really takes to live your life.


Have you felt the impact of inflation as yet? In what way?