Time to read: 3 min

While the CPI is a crucial economic indicator, there’s a noticeable gap between what it reports and what people feel day to day. Let’s dive into this disconnect and what it means for you as a consumer and a financial planner.

The CPI and Inflation: What Are They?

The CPI, or Consumer Price Index, is a statistical measure used to track the average change in prices over time that consumers pay for a basket of goods and services. It’s the primary tool used to gauge inflation, which in turn informs decisions by businesses, policymakers, and financial markets. Over the past 18 months, inflation has been persistent, a topic that has dominated news headlines and is top of mind for many consumers.

However, the CPI is a rolling 12-month report, meaning it compares the current prices to those a year ago. While this provides a snapshot of inflation trends, it doesn’t always align with the consumer’s current experience. For instance, the latest CPI report may show a year-over-year increase of 3.4%, but many consumers feel that prices have risen far more sharply, especially for everyday essentials like groceries and gas.

The Disconnect: Reported Inflation vs. Real-Life Experience

This discrepancy is at the heart of our discussion. If you ask the average person who’s just returned from the grocery store, they might laugh at the idea of a 3.4% increase. The reality they face often feels much more substantial. Consider a simple example: a small bottle of soda that cost 99 cents a year ago might now be priced at $3.05. That’s a significant increase, and it’s not an isolated case. Many consumers are seeing their grocery bills skyrocket, sometimes paying $100 more for the same set of items they bought a year ago.

One reason for this disconnect is that the CPI doesn’t capture the full spectrum of inflationary pressures. Certain items, particularly those subject to seasonal fluctuations like energy costs, may be excluded from the core CPI to avoid skewing the data. But for consumers, these costs are very real. The price of gas, which influences the cost of manufacturing, shipping, and driving to the store, is a perfect example of a significant expense that may not be fully reflected in the CPI.

The Impact on Middle-Class Consumers

Inflation is particularly tough on middle-class and lower-middle-class families. While more affluent individuals might own assets like real estate that appreciate with inflation, many middle-class consumers face a different reality. They feel the pinch more acutely because they often live on tighter budgets and must make tough choices about their spending. This might mean opting for generic brands over name brands, delaying major purchases, or even cutting back on discretionary spending like vacations.

Moreover, wage increases tied to the CPI often fail to keep pace with the real cost increases these families face. A 4% raise might be based on the reported CPI, but when real-life expenses have gone up by 10-20%, that raise doesn’t stretch nearly as far.

Navigating Inflation as a Financial Planner

As financial planners, it’s crucial that we help clients understand the real impact of inflation and develop strategies to counter it. This means not just relying on CPI data but also considering the lived experiences of our clients. Encouraging investments that outpace inflation, advising on cost-effective spending habits, and planning for inflation-adjusted retirement savings are all essential steps.

Inflation isn’t just an economic term—it’s a daily reality that affects everyone differently. By acknowledging the gap between reported inflation and what’s felt by consumers, we can better guide our clients through these challenging times, ensuring they’re prepared for the real-world impact of rising costs.

This blog is for informational purposes. Certain information contained herein (including any forward-looking statements and economic and market information) has been obtained from published sources and/or prepared by third parties and in certain cases has not been updated through the date hereof. While such sources are believed to be reliable, The Tranel Group does not assume any responsibility for the accuracy or completeness of such information. The Tranel Group does not undertake any obligation to update the information contained herein as of any future date.