Majority Price Inflation
The cost of living tends to hold steady or to even go down when there is a lot of economic freedom, but in the last several decades in the US, economic freedom has been shrinking as a direct result of government overreach.
This has caused the cost of living to rise in America, so that citizens can no longer afford to buy as many things as previous generations could.
The official statistic which is most often cited for price inflation is the CPI (1)--the Consumer Price Index--but this index looks at a "basket of goods" which not only changes over time, but also involves subjective changes in the weightings afforded to each item.
This makes the CPI very much like the elusive FaceBook/Twitter "algorithms": Each process involves subjective interpretation about "what is important to score" and about "what score should be given."
After these subjective interpretations, the "official" CPI statistic for price inflation for the 32 years from 1984 to 2016 is an average of 2.65% a year (which means that things in 2016 were priced 2.31 times higher than similar things in 1984).
This would be evidence of good news, because the median household income (2) in 2016 was 2.63 times that of 1984, and the mean after-tax income (3) of households in 2016, after adjusting for the changed average number of people in a household, was 3.14 times that of 1984.
If the CPI was considered to be the final word on price inflation, then median and mean households in the US were doing better in 2016 than they were in 1984--because their wages would be considered to be going up faster than the prices did.
But a general feeling is that it is getting harder to make ends meet, so that a deeper look into price changes may reveal that something else is going on which is not captured in the official statistics.
One different way to look at prices is to look at the majority of spending (>50%) and to see if most of the money we spend goes to things which cost us much more than an extra 2.65% a year.
For instance, one item which takes a large chunk of our spending is housing. Back in 1984, the median sales price on a new house in the US (4) was about $80,000 and this figure had risen to over $300,000 by 2016--a final price that was 3.83 times higher than it had been in 1984.
With regard to new houses then, it is not "good" that median household income is 2.63 times what it was in 1984, because the houses themselves cost us 3.83 times what they used to.
In order for us to have retained all of the house-buying power of the median income earners from 1984, the house prices in 2016 would have only been 2.63 times the price that they were back in 1984--they would have risen in tandem with the wages.
Another way to have retained the home-purchasing power of median earners in 1984 would be if the houses costed 3.83 times what they used to cost, but that we also earned 3.83 times the income which was earned back in 1984.
Because of inefficiency from lost economic freedom, median earners are getting priced out of the housing market, so that only high-end earners can afford median-priced homes.
Critics will be quick to point out that houses in 2016 are of higher quality, so that they "ought to" be more expensive to buy--and that consumers have merely shifted their interests and they are willfully buying much less of other things when they buy a house.
This argument, that we pay more for houses by paying less for other things, would lead you to believe that we are only demanding high quality houses and then willfully making the sacrifices required to pay for them.
But this argument breaks down when you start to include the majority of spending.
Only when items are in the minority of our spending, and we shift resources into them, can we say that we are just as well off as before, and merely changing our preferences.
It is impossible to start out with the majority of your spending and to say that, even though it is costing you much more every year, that you are merely changing preferences and are just as well off.
This is because there are not enough preferences (from the minority of your spending) to change out, replace, or sacrifice--in order to pay for the steep rise in the price of things on which you are already spending most of your money.
If you look at the Consumer Expenditure Surveys from the Bureau of Labor Statistics (3), then you will see that in 2016, after adjustment in average number per household (called a "consumer unit"), people spent 4.24 times as much money on Social Security and Pensions as they did in 1984.
Looking at what is spent on Education, you will see that we spend 4.56 times as much money. If you look at what is spent on Health Insurance, we spend 8.88 times as much of our money on it as we did in 1984.
If you take the following 5 line-items from the Consumer Expenditure Survey (3):
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--Housing (32.95%)
--Health Insurance (5.51%)
--Entertainment (5.08%)
--Education (2.32%)
--Social Security/Pensions (11.36%)
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... then you reach just over 57% of all of our spending (on average). The weighted-average cost increase on those 5 line-items--representing 57% of our spending--is just over 4% a year. Why are these prices (on things we spend most of our money on) going up so much faster than average incomes?
Besides the inefficiency resulting from bloated government, another key reason is the growth in the supply of money, specifically the amount of hard currency and checking account balances (sometimes called "demand deposits").
To pay for government programs which are so expensive that tax revenues do not cover them--tax revenue only covers the top 5 or 6 most-expensive government budget items (everything else is not afforded)--the government resorts to printing money, otherwise known as deficit spending.
The level of hard currency and checking balances (5) in 2016 was 6.9 times higher than it had been in 1984. When government gets so big that it must resort to deficit spending to keep all of its programs running, then people pay the price in terms of a higher cost of living and lower living standards at the mean and median wage.
To raise living standards for Americans, a reduction in the size and scope of the government is required.
If the government was so small that it did not even think of resorting to deficit spending to pay for expensive programs, then wages could begin to rise faster than prices, as they did for the last half of the 19th century (when government was small and economic freedom was abundant).
This is going to become even more important for us as the baby boomers retire in peak numbers in the next decade, inducing an entitlement crisis in the US.
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Reference
(1) U.S. Bureau of Labor Statistics, Consumer Price Index for All Urban Consumers: All Items [CPIAUCNS], retrieved from FRED, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/CPIAUCNS, October 22, 2018.
(2) U.S. Bureau of the Census, Median Household Income in the United States [MEHOINUSA646N], retrieved from FRED, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/MEHOINUSA646N, October 22, 2018.
(3) Bureau of Labor Statistics. Consumer Expenditure Surveys. Multiyear Tables. https://www.bls.gov/cex/csxmulti.htm, October 22, 2018
(4) U.S. Bureau of the Census and U.S. Department of Housing and Urban Development, Median Sales Price for New Houses Sold in the United States [MSPNHSUS], retrieved from FRED, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/MSPNHSUS, October 22, 2018.
(5) Board of Governors of the Federal Reserve System (US), Currency Component of M1 Plus Demand Deposits [CURRDD], retrieved from FRED, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/CURRDD, October 22, 2018.
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