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Fed says 'no inflation' but middle class reality says otherwise

The middle class is feeling the squeeze, cutting spending on discretionary items and activities while costs on larger-ticket necessities have risen.

The Wall Street Journal analyzed consumer-spending data from the Bureau of Labor Statistics between 2007 and 2013, finding while incomes have remained flat, the cost of essentials such as housing and healthcare have increased. This translates to a 12% increase in inflation for middle-income households over this five-year period--a stark contrast to the Federal Reserve’s claims of low inflation.

Journalist Lizzie O’Leary, who is the host of Marketplace Weekend, discussed the economic challenges faced by the middle class with Yahoo Finance Editor in Chief Aaron Task. “The way the Fed measures inflation and the way that the average American experiences inflation are two very different things,” she says. “The Fed doesn’t count energy, they don’t count food, they don’t count a lot of the stuff where prices move around the most.”

According to the analysis, middle class spending on health care costs rose 24% from 2006-2013 rent increased 26% and education 23%. Another major budget blow—staying connected—home Internet costs soared 81% and cell phone plans rose 49%.

The other side of these rising expenses is revealed in the ways the middle class is cutting back. Spending on food eaten at home increased 12% but spending on dining out was down almost 4%. Other areas where spending slowed: entertainment was down 5% and spending on major household appliances dropped 8%.

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The Journal study looked at the middle 60% of Americans based on income in 14,000 households.

O’Leary says “…the middle class is so important to look at here because they’re sort of this cauldron of both where you see economic aspirations really take a hit and where you see the kind of see the wage stagnation that we talk about here.” Aspirational spending, she says, is major factor in the middle class pinch.

O’Leary also cites a study on holiday debt from Nerd Wallet: “the middle class actually takes longer to pay off that debt than folks below them in the income bracket…the middle class pushes that aspirational spending envelope and they’re really squeezed.”

The hardest part for middle class families may be striking the balance between necessities and luxuries, but Task notes there’s no way to get around the rising costs of necessary expenses such as food, healthcare and education.

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