COMMENTARY: Inflation is headed south, but consumers still can’t avoid pain

Inflation is down significantly from a year ago, and some noteworthy forecasters say the prospects are bright for even lower levels in the days ahead. But, strangely enough, consumers are still deeply worried about high prices, especially for things they are required to buy.

Consider this apparent contradiction. Wells Fargo Economics expects inflation, as measured by the Consumer Price Index, to register 2.9 percent this year and 2.5 percent in 2025, compared with 4.1 percent in 2023. The Wall Street Journal’s economics panel is calling for about 2.3 percent in 2024 and 2025. In theory, consumers agree. The latest University of Michigan Consumer Sentiment Survey shows they expect lower future inflation, which is exactly what the Fed and most everyone else is pulling for. But the same survey shows consumers are simultaneously worried about higher prices going forward.

Let’s try to make some sense of it.

The CPI and the Fed’s preferred Personal Consumption Price Index may be headed south, but the prices of large-expenditure items in the family budget are headed north, and it’s mainly due to the effects of past inflation. It turns out that inflation is a tough, long-lasting task master.

As MIT economist Kristin Forbes put it: From “the viewpoint of households, it has not been so successful. Many have taken a big hit to their wages. Many consumers believe the basket of goods they buy is now much more expensive.” If in doubt, I believe we should trust individual consumers to know how they are doing. White House and other economists’ stock-in-trade is large-scale data, but broad measurements don’t show what’s happening with individual family budgets.

So, what are the unavoidable price increases putting a wrecking bar to those budgets, and how do they relate to past inflation?

First, take a look at auto insurance, required by law if one is going to drive. It’s 18.6 percent more expensive than a year ago, and up 47 percent since the 2020 pandemic. Inflation has also pushed up the price of automobiles, which means it takes a larger policy to cover losses. Yes, gasoline prices are down, but insurance prices are more than devouring the savings.

Then, there’s homeowners’ insurance, required for anyone with a mortgage and viewed as vital by almost everyone else. Rates were up 23 percent in February from a year earlier, and for good reason. Inflation has sharply affected the market value of homes and it takes more insurance to cover losses. With wildfires and hurricanes wiping out insurance company reserves, expect prices to bounce upward.

Finally, there is one last unavoidable price increase that property owners face, no matter where they live. Rising state and local property taxes are another hit. As we all know, you cannot avoid death and taxes.

According to American City and County, property taxes paid by individual families nationwide have risen by 6.9 percent in 2024 — nearly three times the year-over-year inflation reflected by September’s CPI numbers. In 2023, according to Federal Reserve data, taxes rose 7.2 percent compared with 4.1 percent inflation. If local governments are price gouging now, they were better neighbors in 2022, when taxes rose 6.9 percent while the CPI jumped 8.0 percent. But for taxpayers, what difference does it make when the bill keeps climbing?

Maybe you own a house whose value has gone up with inflation, and you can take out a loan on the property to help fund the family budget. If you’re fortunate enough to have a decent retirement portfolio that’s now worth more, you may be able to draw from it. Car buyers can settle for smaller, older, less expensive models. But none of these suggestions is very attractive or even practical. Each would leave you a little worse off than you are today.

Yes, the CPI seems tamed, but that doesn’t mean prices have all been tamed, especially on big-ticket items we’re required to purchase. Inflation is a tough task master indeed. Here’s hoping the Fed and our next president and Congress have learned the lesson, and that they will heed the early warning signs next time.

Bruce Yandle is a distinguished adjunct fellow with the Mercatus Center at George Mason University and dean emeritus of Clemson University’s College of Business &Behavioral Science. He wrote this for InsideSources.com.