Monday, May 20, 2024

Surprise! CBO says Americans have been beating inflation

You’ve probably heard a ton about how “inflation is eroding wages and standard of living!” And many Americans are understandably frustrated in seeing more of their after-tax income going to pay for food and rents and other expenses.

But the Congressional Budget Office took a longer-range view, back before the COVID pandemic hit the country. And know what they found out? That all American income groups paid less of their incomes for everyday items last year than they did in the Trump presidency.
CBO used 2019 consumption bundles to assess changes in the prices of goods and services commonly consumed by households. To assess the effects of inflation on households at different income levels, CBO estimated the change in the share of income required to purchase the 2019 consumption bundle for each income quintile; the agency used the same framework for those estimates that it regularly uses to measure the distribution of income as well as transfers and federal taxes.

CBO’s analysis focused on two measures of income: market income and income after transfers and taxes. Market income consists of labor income, business income, capital income, and other income from nongovernmental sources. Income after transfers and taxes accounts for additional factors such as cash payments from the government (that is, transfers such as those for Social Security and unemployment benefits) and federal taxes. Both measures were adjusted to remove the cost of health care benefits that people receive from the government or their employer, because consumption of those benefits is not included in household consumption as measured by the consumer price index for all urban consumers…. By CBO’s estimate, aggregate incomes grew more than prices did between 2019 and 2023. Over that four-year period, the average annual growth of real adjusted income (that is, adjusted income with the effect of the increase in the CPI-U removed) after transfers and taxes was 2.1 percent, and that of real adjusted market income was 2.6 percent.
Oh did it, then?

We forget what things were like before the pandemic, and how much less everyone made in typical jobs. For example, average hourly wages jumped by a significant amount early in the pandemic (mostly due to lower-wage jobs being the ones more likely to have layoffs), and stayed elevated even after the most severe parts of the pandemic had passed and those lower-wage jobs and businesses came back.

Just because people have more of a cushion, it still doesn’t mean inflation hasn’t jacked up prices in the meantime. CBO admits that things cost quite a bit more than they did in 2019, by an average that ranges to 4.4% to 4.7% a year. In addition, the cost of everyday expenses have gone up slightly more for lower-income Americans than richer ones.

Those differences in cost burdens help to explain why CBO says that lower-income Americans ended up having smaller gains vs inflation than richer Americans did over those 4 years. CBO also says that richer people had bigger gains in income in that time period.
The difference in those percentage changes reflects two factors: Price increases were greater for the typical consumption bundle purchased by lower-income households than they were for that purchased by higher-income households, and the income of households in the highest income quintile grew more in percentage terms than the income of other households did (see Figure 1).

(Reminder - in these charts, the more the share declines, the easier it was to pay the bills.)

We also haven't seen much evidence of a consumer pullback in the face of these higher prices over the last 2 years, which you'd likely be seeing if people were really falling further behind.

Whatever else you can say about the economy, consumers are not pulling back on spending

And guess what? The government also publishes lots of other handy statistics! I'll spare you the charts, but real wage growth has been up steadily; home sales are down from their 2021 boom year but have increased lately; auto sales are up and have been steady lately; and durable goods consumption is up. Inflation has been hovering around 3% for an entire year, which is not especially dire. Hell, even consumer sentiment, which sparked this article in the first place, has been steadily up except for the single month of May—so it's a little early to be pretending there's some kind of downward trend.
I did notice that retail sales were flat in April, so seems like something we'd want to keep an eye on for the next couple of months of data. But we have also seen Aldi and Target announce price cuts this month, which tells me that these companies are starting to see consumers being less accepting of higher prices....and that much of our "inflation" was GREEDflation all along.

Perhaps that's a sign that we are continuing to head back toward trends we saw before the pandemic, which had generally lower nominal increases in wages, spending and prices. But that CBO report is a reminder that as 2023 ended, Americans were generally better off than they were 4 years ago when it came to making ends meet, no matter how annoyed they might be when they get reminded of higher prices in their everyday lives.

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