My fellow Fool Morgan Housel penned a great article earlier this month, "That Crazy, Lying, Deceptive Consumer Price Index." In short, he explained the weighting that the CPI puts on housing costs and how that has helped dampen the impact of soaring food and energy prices on inflation numbers. He also made a good case for why the hefty housing weighting makes perfect sense.
And I agree. Sort of.
There's no arguing that housing is the largest line item on most families' budgets and that a run-up in the cost of housing would wreak a lot more havoc on the collective consumer budget than the rising price of coffee beans (though, to be fair, this makes up a pretty big part of my grocery budget). But unfortunately, facts and reality don't always matter in the soft sciences of economics and politics.
When it comes to consumers deciding whether to open up the spending spigots or tighten the purse strings, I have a feeling it's very rarely done through a sober examining of the ol' budget spreadsheet and much more often the result of psychology. And with the media clawing through the 24-hour news cycle, desperate for readers and viewers, the delicate psychology of the U.S. consumer doesn't stand a chance against gripping headlines telling them that they're being savagely beaten down by these rising prices. Here are just a few gems I was able to find (no digging necessary):
- "More pain at the pump"
- "Rising gas, food prices take toll"
- "Obama's High Food Price Policy Stealing Milk from Babies"
- "On inflation, don't believe your eyes"
- "Gas prices fuel consumer's frustration"
- "Consumers keep eye on rising gas prices"
Of course it'll probably get even worse. As Morgan rightly pointed out last month, many companies have been absorbing the higher prices and haven't been passing them on to consumers. We've seen this from a wide range of companies, from Procter & Gamble
In the end, consumers may not actually be subject to a huge amount of inflation right now, but as long as they feel they're being throttled by rising prices, reality may not matter. And given how dependent our economy is on consumer spending -- and therefore the consumer psyche -- that's less than ideal.