The Cost of Driving and Thriving
A recent press release from the Bureau of Labor Statistics tells me that the cost of living is rising at only a measured pace. The latest Consumer Price Index (CPI) measurement says inflation was only 2.4% over the past 12 months. Excepting a brief spurt during the pandemic, measured inflation has been consistently tame since the late 1980’s. I don’t buy it. Let’s dig into what the inflation numbers really mean.
I like talking about inflation because it’s unintuitive in surprising ways. Too, I’m animated by what I view as a conspiracy to pretend the cost of living is rising slower than it really is. It’s a minor conspiracy. There are no robes or rituals, just a tacit agreement between politicians and economists that the country does better when inflation is perceived to be lower. Some of the downward bias exerted on the data is methodological, but this Viewpoint will focus on a deeper, philosophical bias about what the concept of “cost of living” ought to mean.
We all take it for granted that our society becomes richer over time, mainly thanks to technology. Electric cars and streaming television hardly existed when I was in college twenty years ago. Today, my two girls have never known a world without them. We seem to enjoy ever more access to fancy, new consumer goods and services. We expect more to come.
Another example: I was in the U.K. with my family when my great aunt Violet turned one hundred years old last year. My sister in Michigan brought her iPad to Violet’s birthday party, and my kids and I called her from England using Facetime. Violet could see us but, strangely, did not respond to anything we asked her. “Violet,” I said, “Violet, can you hear us, Violet?” She thought she was watching a recording of us. Violet pointed to the screen and asked my sister, “Can they hear me?” When my sister said we could she replied, “Golly! Isn’t that something!” Then she said, “Oh no, how much is this costing you?” She was concerned about running up some kind of mega long distance telephone bill. Not to worry, the video telephone call was completely free. That’s where technology has brought us. It’s incredible, yet we take it for granted.
You know who doesn’t take technological progress for granted? The government. At least not when it is computing the Consumer Price Index. The CPI treats technological progress as deflationary. For example, the cost of internet service was first added to the CPI in 1998. Internet connections have become much, much faster since then. They have also become more expensive. The absolute cheapest internet plans today are priced similarly to typical plans back in 1998-about $20 per month. Broadband internet service plans are usually over $60 per month. You get a lot more speed—to say nothing of what you can actually do on the internet now versus 1998. Meanwhile, the internet services CPI category has reported significant deflation since 1998. The speed improvements are deemed to be more valuable than the associated cost increase. The rising price of an internet connection produces a negative contribution to inflation. Is that reasonable? Internet service is a basic necessity today, much more so than back in 1998. Many people couldn’t do their jobs or stay connected with their friends and family without it. Our day to day lives require us to pay more for internet today than we had to pay for a luxury good in 1998. Yet the inflation data says we have saved money in the process.
This gets to my philosophical complaint about the CPI. Living standards are expected to rise over time. Therefore, the statistic we use to measure the cost of living should assume some progress. The CPI does not.
Internet service bills are a small example. What about your car? Let’s look way back to 1982 when the CPI methodology was given a major overhaul that makes pre-1982 comparisons even more fraught. In 1982, the best-selling car in the country was the Ford Escort. An Escort had 70 horsepower, achieved about 23 miles per gallon, and lacked numerous safety features and comforts that we now take for granted. The cost was about $6,000. A $6,000 Ford Escort in 1982 would cost $10,680 today according to the CPI specifically for the new vehicles category, not the CPI for all items which is substantially higher.
Bad news. There isn’t a single new car you can buy for that price. The absolute cheapest new cars on the market go for nearly twice what the CPI says they should. Shopping used, that budget will get you a ten-year-old sedan with about 100,000 miles.
The cost of an average new car is $48,000 according to Kelley Blue Book. That includes trucks and SUVs. For a somewhat closer comparison to the 1982 Escort, a 2025 Honda Accord starts at about $28,000, nearly three times its contribution to the CPI. That’s still not a great comparison because the Accord gets over 30 MPG and has nearly 200 horsepower. Is a modern Accord three times better than a 1982 Escort? Arguably yes, but also arguably no. The Honda will last longer, possibly even three times as long. It is safer, but not three times as safe—closer to twice as safe based on fatality data from the National Safety Council. The Honda’s gas mileage is about 50% better. Both get you where you’re going. In that regard they are exactly equal.
My point is that when we think about the cost of living changing over time, we expect the quality of life to rise, at least from a consumer perspective. Our minds don’t naturally make the same adjustments that economists use to control for quality improvements. We expect an automatic transmission, power windows and locks, air conditioning, an array of airbags, and a high quality sound system. All those are standard on the 2025 Accord, but not on the 1982 Escort.
The numbers matter. The Federal Reserve may cut interest rates based on the tame CPI reading. Your cash in the bank will earn a lower return. Social Security recipients can expect only a modest cost of living increase due to the subdued CPI number. The way CPI, and therefore COLA, is calculated, it is almost as if your quality of life freezes the day you start taking Social Security. If you want to take advantage of anything new that comes along in the future, don’t expect your Social Security to pay for it.
Perhaps I should not accuse the data of being biased. Perhaps it is simply designed to measure something different from what I think it ought to measure. It’s not the cost of living that is becoming more and more unattainable. If you want to live like it’s 1982, that life remains pretty cheap. What’s expensive is living in the modern world and availing yourself of all its fabulous stuff. The cost of thriving is going parabolic.
As a final note, it is encouraging that stock market returns seem to be keeping up with the cost of thriving. Bond returns, meanwhile, seem to be tied more closely to the cost of living. At Provident, we have always been big proponents of equities over bonds, whenever possible. Our clients are richer for it.
Miles Putnam, CFA®