Why Aren't Your Prices Falling?

By Jyoti Thottam

If Alan Greenspan is so worried that deflation--falling prices for goods and services--could hurt the economy, why is it that so many prices seem to be going up?

It all has to do with what you're measuring. The core Consumer Price Index (CPI), which the Fed chairman watches, is up only 1.5% (and could turn negative, the Fed warns), but it doesn't include volatile food and energy prices. The cost of services, which includes out-of-pocket expenses that you notice most, has risen nearly twice as much as the core CPI--2.8% in April over the year before. Car insurance rose 9%, consumer health premiums 8%, college tuition 7%. Altogether, services make up about 24% of household spending. Then there's housing, which accounts for 32% of spending. It rose 2.2%.

Offsetting these increases is a 1.7% drop in prices for goods like cars, clothing and computers, which account for 23% of spending. Through productivity gains at home and cheap labor abroad, manufacturers have kept prices low. That's something a dentist or restaurant owner, with less flexible rent and labor costs, can't easily do. Food and energy prices (the remaining 21% of spending) have been rising (energy sharply) over the past few months but are expected to fall later this year. If you include them, the overall CPI was up 2.2% in April.

Another problem with the inflation data is the mythical average household. If you spend a lot on health care or have three kids in college, your reality will not match the norm. To adjust for changes in demographics and spending habits, the average is recalculated every two years. But it still lags some trends. Cell phones and Internet access are significant new expenses for many families that aren't adequately captured in the latest CPI. And today's cost-of-living adjustments don't reflect looming shocks, like the $78 billion cumulative deficit that state governments will soon be making up with hikes in taxes and fees. For many workers, those added expenses will swamp their usual 1% to 2% raises--if they get any raises at all. --By Jyoti Thottam