Are Americans as Poor as They Feel?

BusinessWeek

It depends on what they buy. While some big-ticket expenditures have skyrocketed, the relative cost of many necessities has dropped.

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For many Americans, thinking back to the days of 99¢ gas and 50¢ cups of coffee, it may be cathartic to grumble about how expensive life has become, especially during the current economic downturn. The reality, however, is that a lot of things aren't as expensive as we think—and many things actually cost less in relative terms.

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A look at the cost of living between 1980 and 2010 shows that nominal income rose more than overall consumer prices (nominal income is income not adjusted for inflation). The price of many day-to-day expenses such as food and even energy increased at a slower pace than overall consumer prices, which means their relative costs are lower, while some big-ticket items, such as education and health care, became more expensive, causing a shift in spending.

In 2009 the average household spent $49,067 on such expenses as housing, transportation, food, and entertainment—less than in 2008 but up by $3,692 (in 2009 dollars) since 1984—according to data from the U.S. Bureau of Labor Statistics Consumer Expenditure Survey.

To analyze how costs have changed, Businessweek.com compared the average price of some basic consumer expenditures today with the same expenses back in 1980, the year the U.S. Bureau of Labor Statistics began its ongoing consumer spending survey. Price data came from reports by the BLS and the nonprofit research group Council for Community and Economic Research, as well as other sources.

One New Cost: The Web

The results show that the relative price of such necessities as groceries and fuel decreased over the past 30 years, while the price of big-ticket items, such as health care and education, more than doubled. Also, many households added expenses for media and technology, such as computers and Internet and cell phone service, which add up to more than $1,000 per person per year, on average, reported The New York Times.

One factor driving the shift in costs: productivity. Barry Bosworth, senior fellow of economic studies at the Brookings Institution, says relative prices are down for such items as electronics, which have had rapid productivity gains over the decades.

Education has been one of the biggest contributors to spending increases. Since 1980 the average cost of college tuition and room and board more than doubled in real dollars (jumping nearly 500 percent in nominal dollars), to $20,435 in 2008 per year, according to the National Center for Education Statistics. The rise can be attributed to several factors, including declining state funding for public universities over the last decade, institutions' failure to educate more students with fewer resources, and spending on new technology and such services as student counseling, says Sandy Baum, an independent policy analyst for the College Board and professor of economics at Skidmore College.

Premium for College Education

The increase may seem steep, but Bosworth says the returns on college education have also increased: In 1980 the average college graduate earned 30 percent more than a high school graduate, and prior to the recession, the premium had expanded to more than 60 percent, according to a paper by the National Bureau of Economic Research.

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The emphasis on education also indirectly affected the cost of living, argue Harvard Law School professor Elizabeth Warren and writer Amelia Warren Tyagi in The Two-Income Trap (Basic Books, 2003). As good school districts attracted demand for homes in a community, home buyers engaged in bidding wars that drove up home prices. Many bought homes they could not afford.

In real dollars, the median existing home price in 2006 was up about 40 percent from 1980 levels, according to data from the National Association of Realtors. The gap has narrowed as values have dropped nearly one-fourth from peak levels. Spending on homes, rentals, and vacation properties increased to 20.5 percent of total expenditures in 2009, from 15.9 percent in 1984, BLS data shows.

"When home values were rising rapidly, it was possible to borrow some of the equity to support consumption," says Bosworth. "The result was an increase in consumption that outpaced the growth in incomes."

Medical Cost Nightmare

Another cost that has increased significantly: health care. Health insurance more than doubled to 3.6 percent of the average annual spending (slightly more than they spent on electricity) between 1984 and 2009, according to the BLS. The average annual premium for single coverage this year is $5,049, according to data from the Kaiser Family Foundation. Some factors driving up premiums: rising costs for physician and clinical services, hospital inpatient spending, and hospital outpatient spending, as well as increased use of services, according to a 2008 report by PricewaterhouseCoopers.

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Of course, whether life has become more or less expensive relative to income depends how much one consumes. "Household income, even adjusted for inflation, has increased, which would suggest that well-being has improved," says Scott Hoyt, senior director of consumer economics at Moody's Analytics.

The consumer price index—which includes food and beverage, housing, apparel, transportation, medical care, recreation, education, communication, and other goods and services—grew nearly 160.4 percent, to 214.537, from 1980 to 2009, according to BLS data. In the same period, median household income in nominal dollars increased 181 percent, to $49,777, U.S. Census Bureau data show, or 8 percent in real dollars. BLS data indicate that while high-income earners saw the biggest increase in that period, average income rose for middle-income earners too.

Increasing Financial Obligations

Warren and Tyagi write that compared with the 1970s, more families now have two full-time incomes, but the change in lifestyle led to new needs, such as a second car and day care. After an average two-income family makes its house payments, car payments, insurance payments, and child care payments, it can have less money left over, even though there is a second full-time earner in the workplace, they say.

Financial obligations (mortgage, rent, consumer debt payments, automobile lease payments, and property tax payments) rose to 17.02 percent of disposable personal income in 2010's second quarter, from 15.45 percent in 1980, reaching a high of 18.86 in 2007, according to Federal Reserve data. Financial obligations represent a larger portion of income in many households, but the ratio is affected by high-income earners.

"From the mid-1980s through the middle of this past decade, consumers loaded up on loans. Household debt rose far more rapidly than household income," Hoyt states in a Moody's Analytics report. "Credit-card use expanded rapidly, and technological innovations gave more consumers access to credit, including subprime borrowers."

More Cars, More Computers

Car ownership jumped 14.3 percent, to 1.91 vehicles per household, from 1983 to 2009, according to a report by the U.S.Energy Dept.. Also, new technologies such as computer hardware and software, Internet service, and cell phone service rose from near zero to 2 percent of total spending, according to the BLS.

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Food as a proportion of total expenditures decreased to 13 percent in 2009, from 15 percent in 1984, the BLS says. The CPI for food grew less than overall prices. From 1980 to 2010, the average price in real dollars for one pound of coffee dropped 55.9 percent, to $3.70, BLS data show. The price for one pound of ground beef dropped 31.7 percent (inflation adjusted), to $2.72, according to Council for Community and Economic Research.

In 2010, the price of agricultural commodities has been rising, but retail prices for food do not increase in tandem with commodity prices. A 10 percent change in the commodity price for coffee, for example, is likely to result in a 3 percent change in the retail price, according to a report by the U.S. Agriculture Dept.

Other categories with spending decreases include energy—although prices are volatile. BLS data show that in inflation-adjusted dollars, 2009 real spending on natural gas was 21.2 percent below 1984 levels and spending on gasoline fell 9 percent. Also, apparel and services such as dry cleaning fell to 4 percent of total annual expenditures, from 6 percent in 1984, according to the BLS.

In the downturn, expenditures have been cut and savings have increased, yet Bosworth notes that the U.S. "is still an extraordinarily rich society where Americans maintain outsize consumption 'needs' relative to other societies." Even as prices fluctuate, how much one spends can depend less on what individuals need than on what they want.

What Americans Are Really Paying for the Things They Buy Most

Three Decades of Price Changes

When you look at the price tags on consumer goods, it would seem that costs have skyrocketed over the last 30 years. If you adjust for inflation, however, the relative cost of items such as food, manufactured goods, and energy has fallen since 1980, while prices for other necessities such as housing, education, and health care have increased significantly. Moreover, consumers have taken to new services that carry bills they didn't have to pay in the 1980s: Payments for Internet access, cable TV, and cell phones together total more than $1,000 per year in bills for many Americans, according to a February report in The New York Times. Businessweek.com compared national average prices in 1980 and 2010 for 35 products and services that range from milk and bread to haircuts and doctor's visits. Comparative figures are based on numbers provided by the Council for Community and Economic Research's ACCRA Cost of Living Index, the U.S. Bureau of Labor Statistics Consumer Expenditure Survey, and other pricing-data sources.

Personal Computers

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Jetta Productions

1981: $3,693 in 2009 dollars (*$1,565 in 1981 dollars)
2009: **$710
Change in Real Dollars: -80.8 percent

As technology has improved, computer prices have declined sharply when you adjust for differences in quality. Prices for computers and peripheral equipment have dropped by over 90 percent since 1998, according to the U.S. Bureau of Labor Statistics. The example above reflects the price decrease in real dollars, based on IBM's (NYSE: IBM - News) first personal computer, which made its debut in 1981 with a price tag of $1,565. That compares to the average selling price of all computers and laptops in June 2009, according to market research firm NPD. Few people in the 1980s owned personal computers. Dramatic price drops have since made them accessible to millions.

*Price for IBM 5150 in 1981; **Average price for all computers and laptops in June 2009 from NPD

Coffee

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1 lb., ground roast

1980: $8.38 in 2010 dollars ($3.18* in 1980 dollars)
2010: $3.70*
Change in Real Dollars: -55.9 percent

Caffeine addicts may groan about how much they spend on coffee but prices are effectively lower than they were in 1980, when looked at in real dollars. Perhaps that is why they drink so much of it. Starbucks (NasdaqGS: SBUX - News) sales increased from $93 million in fiscal 1992, the year the company went public, to $10.7 billion in fiscal 2010. Due to oversupply, world coffee prices hit a 30-year low in 2001, according to Oxfam.

*1980 and 2010 prices from U.S. Bureau of Labor Statistics

Coca-Cola

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Bloomberg via Getty Images

2-liter bottle

1980: $3.35 in 2010 dollars ($1.27 in 1980 dollars)
2010: $1.51
Change in Real Dollars: -54.9 percent

Over the decades, soda has become a bargain, to the chagrin of health advocates. The price of a 2-liter bottle of Coca-Cola (NYSE: KO - News) in nominal dollars has increased only slightly in the last three decades, to $1.51 -- less than the 1980 price in real dollars. Americans now drink almost 50 gallons of soda per person per year, compared to almost 34 gallons in 1980, according to a study by Texas A&M University.

Sugar

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5 lbs.

1980: $4.64 in 2010 dollars ($1.76 in 1980 dollars)
2010: $2.30
Change in Real Dollars: -50.4 percent

Sugar prices boomed in 1980, leading manufacturers to shift to high fructose corn syrup. U.S. net imports fell from 5 million tons in 1974 to 3 million tons in 1980 and down to 690,000 tons in 1987, according to a report from the 1997 International Sugar Conference. Soft demand led raw sugar prices to drop 86 percent in five years to a record low in 1985, according to the book, The International Sugar Trade.

Tennis Balls

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Wilson Sporting Goods, Inc.

Can of three

1980: $5.24 in 2010 dollars ($1.99* in 1980 dollars)
2010: $2.99*
Change in Real Dollars: -43 percent

Tennis balls wear out quickly and lose their bounce, so it's a good thing they are still cheap. A can of three Wilson tennis balls has increased by merely $1 in the last 30 years. Part of the reason: Manufacturing moved to less-expensive markets. Wilson Sporting Goods, for example, moved its tennis ball manufacturing to Thailand from South Carolina, according to a 2001 press release.

*1980 and 2010 prices from Wilson Racquet Sports

Movie Theater Ticket

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1 adult

1980: $8.72 in 2010 dollars ($3.31 in 1980 dollars)
2010: $8.82
Change in Real Dollars: +1.1 percent

The average cost per ticket at theaters is $8.82 nationwide (on par with 1980 prices in real dollars). It is far costlier in some places. New York theaters can charge as much as $13 per ticket -- $17 for a 3D movie. Bring an additional $10 if you want to treat yourself to soda and popcorn.

Bread

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Per loaf

1980: $1.34 in 2010 dollars ($0.51 in 1980 prices)
2010: $1.39
Change in Real Dollars: +3.4 percent

We're not talking about artisan breads or herb-infused foccacia. The ACCRA Cost of Living Index rates bread prices by the cost of the loaf fetching the "lowest price" at the grocery store. Fortunately for toast-crunching, sandwich-loving Americans, a standard loaf in 2010 costs about as many real dollars as it did in 1980.

Home Price

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Getty Images/Brand X

1980: $166,946 in 2010 dollars ($64,200* in 1980 dollars)
2010: $172,600*
Change in Real Dollars: +3.4 percent

Median home prices in 2006 were about 40 percent above 1980 levels (inflation adjusted), based on data from the National Association of Realtors. That gap has since narrowed significantly with the drop in home values. According to NAR: "From 1968 through 2009, even with periods of double-digit inflation and several years of price declines that begin in 2007, the national average annual price gain was 5.5 percent." Mortgage rates have decreased to about 5 percent today, from over 13 percent in 1980, according to historical data from Freddie Mac on 30-year fixed-rate mortgages.

*September 1980 and September 2010 median prices for existing single-family homes from the National Association of Realtors

Household Income

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1980: $46,109 in 2009 dollars ($17,710* in 1980 dollars)
2009: $49,777*
Change in Real Dollars: +8 percent

Median household income has nearly tripled in nominal value since 1980; in constant dollars the gain was about 8 percent. Real prices for many items stayed level or declined from 1980 to 2010. Consumers spent more, however, on such big items as college tuition and health care.

*1980 and 2009 data from U.S. Census Bureau. Estimates on 2010 median household income were not available by time of publication

Man's Haircut

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1980: $12.15 in 2010 dollars ($4.61 in 1980 dollars)
2010: $13.18
Change in Real Dollars: +8.5 percent

Men's haircuts may cost more now than in 1980, but that doesn't mean barbers are getting rich: In 2009, the median salary for barbers in the U.S. was $24,160, only about 30.4 percent more than 1999's $18,530 (in nominal dollars), according to BLS data.

Wong is a lifestyle and real estate reporter for Bloomberg Businessweek.

NOTE: Unless otherwise stated, nominal prices on all slides are based on the Council for Community and Economic Research's ACCRA Cost of Living Index reports for second-quarter 1980 and the same period in 2010. C2ER surveyed a greater number of cities in 2010 than in 1980. The 1980 and present-day prices for some items may come from different sources, but they refer to comparable products or brands. On all slides, the price change is based on the difference in real dollars, adjusted for inflation. The inflation-adjusted value was calculated using the U.S. Bureau of Labor Statistics' consumer price index. $1 in June 1980 had the same buying power as about $2.64 in June 2010.

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