One of the biggest mistakes we make when talking about inflation is pretending that everyone experiences the same thing.
They don’t.
The inflation number you hear about on TV is an average.
The government takes the changing prices of housing, food, gasoline, cars, healthcare and a whole bunch of other things, gives each one a certain weight, and puts it all together into one number.
That’s useful. We need some way to measure these things.
But an average of vastly different economic realities doesn’t necessarily tell you the full story.
Think about a classroom with 10 kids. Nine of them get a 70 on a test, and one gets a 100.
The average tells us something about the class, but it doesn’t tell us what any individual kid actually scored.
Inflation works the same way.
If you just bought a house, your experience with inflation is different from someone who bought one five years ago.
If you drive 60 miles to work every day, gasoline matters a lot more to you than it does to someone working from home three days a week.
This is why I think we need to be careful when we say things like, “Everything is so much more expensive.”
Some things absolutely are. Some aren’t.
And gasoline is a great example.
Gas Was Expensive 20 Years Ago Too
People talk about gasoline as though the price just keeps going higher every year.
It doesn’t.
Americans were already paying around $4 per gallon during the oil spike in 2008.
Prices at the pump got back around those levels during parts of the following decade, and then went above $5 nationally during the spike in 2022.
Think about that for a second. We were paying around $4 for gasoline almost 20 years ago.
Meanwhile, wages are higher. Restaurants cost more. Hotels cost more. Houses cost a lot more.
Four dollars in 2008 was worth a lot more than four dollars is worth today.
So, while gasoline can certainly spike from one year to the next, the longer-term picture looks different.
Adjusted for inflation, gasoline hasn’t gone through anything close to the same long-term increase that we’ve seen in something like housing.
But there’s another part of this that gets overlooked.
How much gasoline you buy matters just as much as how much it costs.
Before COVID-19, working from home was relatively rare. Today, millions more Americans work from home at least part of the week.
Imagine someone who lives 15 miles from the office. That’s a 30-mile round trip. Five days a week for 50 weeks comes out to about 7,500 miles of commuting every year.
Now, imagine that person only goes into the office three days a week. That’s 4,500 miles.
They just eliminated 3,000 miles of commuting without the price of gasoline falling by a penny.
They’re buying less gas, putting fewer miles on the car, and spending less time sitting in traffic.
None of this means gas is cheap for everybody.
If you drive a truck 50 miles to work every morning, you couldn’t care less that someone else works from home.
That’s exactly the point. Your inflation isn’t necessarily my inflation.
And nowhere is that more obvious than housing.
It Matters What You Own
If there’s one place where people complaining about higher prices have an incredibly strong argument, it’s housing.
Housing is expensive. Really expensive.
Home prices went way up. Then mortgage rates went way up, too.
That’s a nasty combination. When you buy a house, the price is only part of what determines how much it costs you every month. The interest rate matters enormously.
Take a $400,000 mortgage. At a 3% interest rate, the principal and interest payment is about $1,700 per month.
At 6.5%, it’s more than $2,500.
Same amount borrowed, same 30 years to pay it back. But now you’re spending more than $800 extra every month.
And that’s before we even account for the house itself getting more expensive.
Imagine a family buying a $400,000 house several years ago. They put 20% down and borrowed $320,000 at 3%. Their principal and interest payment would be around $1,350 per month.
Now, imagine a similar house costs $500,000. Put the same 20% down, and you’re borrowing $400,000. At around 6.5%, the payment is more than $2,500 per month.
You’re getting roughly the same house. But the monthly mortgage payment is almost twice as much.
That’s real inflation. There’s no way around it.
But here’s where the story gets interesting.
The person who bought the house five years ago doesn’t have today’s mortgage.
They still have the old one.
Their house might be worth dramatically more today, but their monthly principal and interest payment hasn’t changed. If they locked in a mortgage around 3%, they get to keep that rate for 30 years.
So the person trying to buy the house today thinks housing is outrageously expensive.
The person who already owns the house next door might have one of the best financial deals of their lifetime.
This is also one of the reasons so many people aren’t moving. Selling the house doesn’t just mean giving up the house. It means giving up the cheap mortgage, too.
And that mortgage has become valuable all by itself.
Now, take this idea one step further: What if the homeowner also owns stocks?
What if higher prices at a company mean higher profits for a business that he owns?
What if the electric bill goes up, but he owns the utility? What if natural gas gets more expensive, but he owns the pipeline carrying it?
What if memory chips get more expensive, but he owns the semiconductor company selling them?
Now the same inflation can hurt one person and help another.
That’s where I think this conversation gets much more interesting.
Two families can have the same income and live in nearly identical houses.
One bought years ago with a cheap mortgage and owns a portfolio of stocks. The other rents, is trying to save for a house and has very little invested.
On paper, they may look similar. In real life, they’re experiencing completely different economies.
That’s why I don’t think the lesson is that inflation isn’t real.
Of course it’s real.
The lesson is that there is no single inflation experience.
It depends on what you buy. It depends on what you already own.
It depends on whether you need a new house today or bought one five years ago.
It depends on how much you drive and whether you commute at all.
And increasingly I think it also depends on whether you only pay the higher prices or own the assets benefiting from them.
That’s a very different way of thinking about inflation.
Because the next time someone tells you what “the consumer” is experiencing, remember what we’re really doing.
We’re taking an average of vastly different economic realities.
And sometimes the average is the least interesting part of the story.
Stay sharp,
JC Parets, CMT
Founder, TrendLabs