Soaring gas prices are getting all the headlines, but inflation is hitting many parts of the household budget, including some that are more important than gas but not quite as visible.
The annual inflation rate hit 7.9% in February, the highest level since 1982. Many consumers have grown familiar with eye-popping price hikes due at least in part to supply disruptions stemming from the COVID pandemic. Prices are up 12.4% for new cars and 41.2% for used vehicles. Gas prices, suddenly driven higher by the Russian invasion of Ukraine, are up 38%. Food prices are up 8.7%.
At some point this year, inflation in certain categories is likely to moderate, because numerical anomalies caused by the pandemic will finally start to disappear. The cost of airfare, for instance, is up 12.7% during the last 12 months, but airfares plummeted when COVID hit and they’re still lower than before the pandemic. Healthcare costs used to rise two to three times as much as overall inflation, but people have put off medical visits during the last two years, and those costs are now rising far below overall inflation.
Since it’s now a full two years since COVID triggered an abrupt recession and changed spending patterns in ways that still persist, it makes sense to look at price changes during the last two years to see where inflation has really raised living costs. While one-year inflation is a hefty 7.9%, two-year inflation is just 9.7%, or 4.4% per year. Average earnings have risen 10.6% during the last two years, or 5.3% per year. By that measure, the typical household is a little better off since COVID hit.
It also makes sense to combine inflation with the things people spend the most money on, to gauge how much stress the typical family budget is really under. Average household income, before taxes, is about $84,000. The typical family spends around $61,000 per year. One-third of that goes toward housing. Transportation accounts for 17% of household spending, food 13%, and healthcare 8%. For all the attention gas prices get, gasoline is only about 3% of household spending.
The cost for housing, the top spending category, has risen a modest 7.8% during the last two years, which is less than incomes have risen. That means the typical consumer has kept up with housing costs. Still, higher housing costs represent an additional $1,621 in expenses this year, compared with 2020.
Transportation is clearly the biggest strain on family budgets. Total transportation costs, including vehicles, fuel and maintenance, are up 17% since 2020, leading to additional spending of $2,147 per year. That’s a bigger increase in dollars than the added cost of housing, even though transportation is a smaller part of the family budget. The price of gasoline, a subset of transportation, is up 40% since 2020, forcing the typical household to spend $836 more.
Household energy—heat and electricity—is another budget buster. Those costs are up 17% during the last two years, for an extra $689 in annual spending. Prices for food and household furnishings are also up by a little more than earnings since 2020.
Inflation isn’t everywhere. Three major categories of household spending—health care, education and clothing—have risen by less than 5% during the last two years. Those three categories combined represent about 14% of household spending, one part of the budget that on average has been easier than usual to control.
Economists think many consumers have saved enough money to weather higher prices … for a little while. Plus, Russia’s barbaric invasion of Ukraine provides a bit of cover for higher gas prices, with many motorists saying they support tough sanctions on Russia even if they force Americans to pay more for fuel.
Many forecasters are nonetheless reducing the outlook for U.S. economic growth this year, to 4% or less. That’s decent, but the job market and other parts of the economy still haven’t fully recovered from all the COVID losses. Inflation could go higher still in coming months, testing consumers’ resolve. Gas prices aren't the whole story, but they'll likely lead the way.
Rick Newman is the author of four books, including "Rebounders: How Winners Pivot from Setback to Success.” Follow him on Twitter: @rickjnewman. You can also send confidential tips.