Rising Inflation Doesn't Impact Everyone the Same

Monday, December 19, 2016

Housing costs inflation
Thinkstock/xeni4ka

Inflation seems to be on the rise, as evident by increases in the consumer price index (CPI). However, a recent Economic Synopses essay explored why not everyone feels price increases the same way.

Economist YiLi Chien and Research Associate Paul Morris first discussed how the CPI works. Namely, it measures the average change over time in the prices for a market basket of goods and services. They wrote: “CPI is thus regarded as a measure of the cost of living of an average American.”

However, short-term changes in the CPI can be heavily influenced by changes in food and energy prices, which tend to be volatile. So, some use a measure called core CPI, which excludes these two categories, to gauge inflation. As can be seen in the figure below, core CPI has been much less volatile than overall CPI.

Even with these two measures, consumers may still not see how inflation is impacting their specific situations. As Chien and Morris wrote: “Because consumption decisions vary from person to person, very few Americans consume the average market basket measured by the CPI.” To explore this further, the authors examined two areas that make up significant portions of the average household’s spending: housing and medical expenses.

Inflation and Housing

The figure below shows the year-over-year inflation rate for housing services (shelter), which make up about 20 percent of an average household’s spending, compared to core CPI. 

As the figure shows, housing costs have been trending upward. However, this trend affects various groups in very different ways.

For example, Chien and Morris noted that the Bureau of Labor Statistics (BLS) actually calculates the value of the service that housing provides, rather than the value of the housing itself. For renters, this would be the cost of rent, so inflationary pressures associated with housing services would have a direct effect.

For homeowners, though, the BLS calculates implicit rent, or how much they would pay to rent their home if they didn’t own it. Implicit rent may rise, but it wouldn’t actually affect this group’s housing costs.

Inflation and Medical Services

Regarding medical services, which make up about 8 percent of an average household’s expenditures, Chien and Morris noted that the inflation rate rose from 1.8 percent in February 2015 to 5.1 percent this past August, as shown in the figure below.

Of course, not everyone consumes medical services at the same rate. The authors cited a 2004 paper that found that nearly half of lifetime medical expenses typically occur after age 65.1 They wrote: “In addition, health insurance coverage has a significant impact on how much individuals spend on medical services. For those without health insurance, rising costs directly correlate with out-of-pocket medical expenditures. And the cost increases could be significant relative to total income.”

Chien and Morris concluded by noting that inflation, core inflation and housing services inflation are all still lower than before the 2007-09 recession, though medical services inflation is higher. They wrote: “Inflation has been on an upward trend recently; and if inflation rates continue to pick up, the increases are likely to impact various subsets of the population more than others.”

Notes and References

1 Alemayehu, Berhanu; and Warner, Kenneth E. “The Lifetime Distribution of Health Care Costs.” Health Services Research, June 2004, Vol. 39, Issue 3, pp. 627-42.

Additional Resources


Posted In HousingInflation  |  Tagged yili chienpaul morrisinflationhousingmedical serviceshousing costscpicore cpi
Commenting Policy: We encourage comments and discussions on our posts, even those that disagree with conclusions, if they are done in a respectful and courteous manner. All comments posted to our blog go through a moderator, so they won't appear immediately after being submitted. We reserve the right to remove or not publish inappropriate comments. This includes, but is not limited to, comments that are:
  • Vulgar, obscene, profane or otherwise disrespectful or discourteous
  • For commercial use, including spam
  • Threatening, harassing or constituting personal attacks
  • Violating copyright or otherwise infringing on third-party rights
  • Off-topic or significantly political
The St. Louis Fed will only respond to comments if we are clarifying a point. Comments are limited to 1,500 characters, so please edit your thinking before posting. While you will retain all of your ownership rights in any comment you submit, posting comments means you grant the St. Louis Fed the royalty-free right, in perpetuity, to use, reproduce, distribute, alter and/or display them, and the St. Louis Fed will be free to use any ideas, concepts, artwork, inventions, developments, suggestions or techniques embodied in your comments for any purpose whatsoever, with or without attribution, and without compensation to you. You will also waive all moral rights you may have in any comment you submit.
comments powered by Disqus

The St. Louis Fed uses Disqus software for the comment functionality on this blog. You can read the Disqus privacy policy. Disqus uses cookies and third party cookies. To learn more about these cookies and how to disable them, please see this article.

Subscribe to
On the Economy

Get notified when new content is available on our On the Economy blog.

Email Alerts  |  RSS

About the Blog

The St. Louis Fed On the Economy blog features relevant commentary, analysis, research and data from our economists and other St. Louis Fed experts.


Views expressed are not necessarily those of the Federal Reserve Bank of St. Louis or of the Federal Reserve System.

Contact Us

For media-related questions, email mediainquiries@stls.frb.org. For all other blog-related questions or comments, email on-the-economy@stls.frb.org.

Categories