Solutions Economic and Market Watch

Hello, and welcome to the Economic and Market Watch podcast for the week of February 20, 2024. This is Sam Kem of CFC.

U.S. economic growth is so strong. Consumer spending is resilient. The stock market is booming. Even consumer sentiment is improving.

If the economy is so strong, then why the long face? Some may say it's because you've been reading too much negative news. But as a regular reader of The Wall Street Journal and Bloomberg, the two most established financial and economic news outlets, I can tell you that I have been fed more optimism than pessimism. And here I am, all glass-half-empty.

Actually, I'll take that back. The glass is not half empty. It's leaking.

I know over the years, we have been giving our audience so much data from key economic indicators to financial market data. Today, I'm going to compare those fancy data with real-life experience to see why people such as myself cannot be too excited about the supposedly high economic growth rate.

To do that, I'm going to pick one economic measure that I believe is the key to understanding the gap between official data and a lived experience.

That is inflation measure. You see, inflation measure is the one economic measure that, if miscalculated, will lead to miscalculation of other economic measures. For example, what we call economic growth often refers to real GDP growth rate, which is nominal GDP growth rate adjusted for inflation. Therefore, if you miscalculate inflation, you miscalculate economic growth rate.

So now, let's see our real-life experience of inflation and compare it with official inflation measures. There are two type of inflation measures that are commonly used, consumer price index or CPI and personal consumption expenditure index or PCE. Let's see how they compare to a real life experience.

In CPI, shelter, which is anything related to housing such as rent or cost of shelter when you travel, accounts for a bit over one-third of the consumption basket. That is if you have a budget of $6,000 a month, you spend a bit over $2,000 on housing and $4,000 on other things.

I don't know about you, but as a resident of the DC Metro Area, my housing cost is way above $2,000 a month, but I certainly spend much less than $4,000 on other things. That means much more than one-third of my monthly consumption goes to housing. So ask yourself this. Is your housing cost more or less than one third of your monthly consumption? If it's a lot more, then CPI likely underestimates the inflation that you actually face in real life because shelter inflation runs at 6%, way above the CPI inflation rate of 3.1%.

Underestimating the share of housing costs in our monthly consumption is basically underestimating the inflation that we actually face in real life.

Another example is all these fees and tips that have been recently added or increased. Where are those in CPI and PCE?

When you go to a self checkout machine, many of you might have already witnessed the screen asking you whether you want to tip 20 or 25%. Services that never expected tips before now do. And sure, they're optional, but the pressure is there to force consumers to spend more than they used to.

PCE also has this special methodology that accounts for substitution. That is, it calculates inflation in a way that accounts for consumers switching to a cheaper substitute product when the price of one good increases.

For example, if steak prices increase, consumers switch to ground beef. This allows the effect of inflation to appear smaller, although in real life our standard of living decreases.

And then they wonder why American consumers are so grumpy about this economy. Well, let's just say that I'm not happy that I have to eat ground beef instead of the steak that I used to be able to afford, no matter how high the economic growth rate is.

Enough grumpiness for today. Thank you for listening, and be sure to download the Economic and Market Watch dashboard. Talk to you soon.