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Consumer Discontent: Study Says Higher “True” Inflation Explains Why Americans Are Glum About Economy

Isaac Nuriani    |
Mar 8, 2024
  • Researchers say CPI should include interest costs to be accurate.
  • True inflation is closer to 8% right now, according to study.
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One of the more curious mysteries of the Biden years is the disconnect between what looks like solid economic data and how Americans actually are feeling about the economy. 

The government’s headline unemployment rate may be the most notable example of the data at issue. For the last two years, the unemployment rate has remained below 4%, implying full employment for all that time. We’ve not seen a run of sub-4% unemployment like this since the late 1960s; truly impressive, it would seem.[1] 

Still another number that’s nothing to sneeze at is the growth of real domestic product (GDP) in 2023: 3.1%, if you’re measuring from the fourth quarter of 2022 through the fourth quarter of 2023.[2]  

Then there’s consumer spending, which makes up an estimated 70% of GDP and therefore is generally regarded as the principal underlying driver of economic growth. In the most recently completed quarter, consumer spending grew at an energetic annualized pace of 3%.[3]  

And how about inflation? Inflation certainly has reached extraordinary heights in the last couple of years. But it also has declined steadily from a June 2022 peak of 9.1% to 3.1% in January 2024.[4] 

Yet despite this relief in price pressures – along with the other upbeat data – rank-and-file Americans don’t seem particularly happy about the economy.  

A poll conducted late last year by the Financial Times and the University of Michigan found that only 14% of American voters believe they’re better off now than when President Biden took office.[5] Just last month, a Gallup poll revealed that the president’s overall approval rating among Americans had slipped to just 38%, while his handling of the economy garnered an even-more-measly 36% approval rating.[6] 

And according to Dana Peterson, chief economist at The Conference Board, the February drop in the board’s widely followed Consumer Confidence Index “reflects persistent uncertainty about the U.S. economy” among Americans.[7] 

So, what gives? What accounts for this disagreement between the data and Americans’ view of the economy? 

One possibility is that there may be something wrong with the “mechanics” of the numbers. In a recent economic update, Augusta’s director of education Devlyn Steele discussed the concern that irregularities in the data-collection methods utilized on behalf of such high-profile metrics as the consumer price index and the monthly Job Openings and Labor Turnover Survey could be reflected in the final measures. 

Another possibility is that the numbers – to the extent they are accurate – may not be telling the whole story to those who aren’t taking an in-depth look at the data.  

Take the government’s December 2023 headline jobs data that shouted the topline numbers “216,000 jobs added” and “3.7% unemployment rate.” Buried deeper in the report are some inconvenient realities, including the fact that the number of people with full-time jobs fell by about 1.5 million that month.[8] 

There’s another possibility for the disconnect, as well, one put forth in a recent study assembled by high-profile researchers from the International Monetary Fund and Harvard University – including Lawrence Summers, the former Secretary of the Treasury under Bill Clinton. 

In short, the researchers collectively argue that inflation is being improperly calculated nowadays. And that if it was being measured correctly, the burdensomely high true level of inflation would be known…and the reasons why consumers are so glum would be crystal clear. 

Could this be the explanation for the mystery concerning ongoing consumer discontent? More importantly, should consumers and policymakers be looking at inflation through a different lens so they can potentially take more meaningful steps to neutralize its impact? 

Let’s see if we can find out. 

Researchers: “Consumers Consider the Cost of Money as Part of Their Cost of Living” 

The paper in which the study’s analysis and results are presented – The Cost of Money is Part of the Cost of Living: New Evidence on the Consumer Sentiment Anomaly – is more than 40 pages long, so we’re going to limit our discussion here to the high points. 

The central argument made by the study is that inflation is not calculated correctly now because it doesn’t take into account the cost of money; interest rates, in other words. 

“Consumers, unlike modern economists, consider the cost of money part of their cost of living,” the study’s authors note.[9] 

The authors detail such realties as the fact that, since 2021, historically high home prices have conspired with soaring interest rates to more than triple the monthly payment on a perfectly average house purchased with a 30-year fixed-rate mortgage. They note, as well, that the average payment on a new car loan has jumped by more than 80% since the beginning of the pandemic.[10] 

Stating the obvious, the study authors write, “It is not surprising that this would affect how consumers feel about the economy,” clarifying: 

“These increases in the cost of living do not make it into economists’ measures of inflation, however.”[11] 

No, they don’t. But they used to. 

The researchers point out that key cost-of-money factors were included in the consumer price index (CPI) before the metric was redesigned in 1983.  

From 1953 until 1983, essentially the full weight of total housing expenses were reflected in CPI by “taking house prices, mortgage interest rates, property taxes and insurance, and maintenance costs as inputs.”[12] 

The researchers admit this methodology meant CPI was overstated at that time. But they also suggest the revision 40 years ago has resulted in a measure that’s painfully inaccurate for consumers. 

“Mortgage costs are a decisive factor in consumers’ assessment of their ability to make what for many Americans amounts to the most meaningful purchase of their lives,” researchers note. “The exclusion of these costs means that the current methodology excludes a central part of consumers’ financial well-being.”[13] 

More broadly, the study suggests that considering the degree to which consumers now rely on credit to actually do their consuming, a CPI that doesn’t reflect finance expenses is woefully inaccurate. 

“Given auto debt’s significance as a percentage of total debt and the car-centric culture in the United States, consumers are likely to closely monitor the financing costs of their automobiles,” researchers write. “It remains absent, however, from measurements of the cost of living.”[14] 

Study Suggests True Peak Inflation During This Cycle Was Roughly 18% 

The perceived inaccuracy of CPI isn’t only a function of the fact that housing- and automobile-related finance costs are absent from the measure. Researchers argue that the use of credit for purchase transactions of all kinds has become so widespread that to exclude the cost of money from CPI is effectively negligent. 

“Since the onset of the pandemic, the share of purchases made using cash has fallen precipitously,” researchers write. “Currently, consumers use cash for less than one-fifth of their total purchases.”[15] 

According to the researchers, if CPI was calculated in a manner such that borrowing costs were fully reflected in the metric, it would have peaked at around 18% in November 2022 – “when consumer sentiment was at its lows,” they point out – and would have come in at 8-9% as recently as November 2023.[16] 

For those persistently puzzled by the disconnect between the thriving economy and the view of that economy from the vantage point of everyday Americans, the researchers are saying there’s no great mystery at all: Account for borrowing costs in CPI, and there likely won’t be any disconnect to explain. 

But there is, in my opinion, an even more important issue here than how Americans are feeling about the economy or the administration serving as its principal steward. That would be the matter of knowing what actually is going on in the economy; of knowing where things really stand, so that those with a stake in the economy – which is everyone, frankly – are able to employ the measures they deem most appropriate to help optimize their own financial journeys. 

Let’s touch on that as we close out. 

Uncertainty Expected to Be a Prominent Gold Driver This Year 

If investors are left to merely speculate as to what’s really going on in the economy, then it follows that the reality they’re living is one characterized by a large dose of uncertainty 

Uncertainty isn’t a cue to step away from trying to effectively navigate the landscape on the basis that the economic environment might seem inscrutable. For some savvy investors, it will be a cue to do the opposite; to strive even harder to make productive headway in the midst of what could be a more challenging situation. 

Investors in such a situation might see a potential benefit to including among their holdings those assets that have, at times, not only remained resilient but even thrived in the midst of uncertainty. For some, precious metals may come to mind as examples of such assets. 

In fact, some of the largest investors seeking to hedge their portfolios and reserves against the impact of uncertainty have turned to precious metals recently for help with the effort. For example, regular readers of this blog may know that central banks have been net purchasers of gold for 14 consecutive calendar years and buyers of gold at or near all-time highs over the last two years.[17] Among the most prominent reasons cited by central banks for why they’re consuming so much gold are its “performance during times of crisis,” its potential as a “long-term store of value,” and its capacity to serve as an “effective portfolio diversifier” – reasons that, in one way or another, exemplify uncertainty.[18] 

Many institutional investors, including hedge funds, also are turning to gold because of its perceived value in helping to mitigate the impact of uncertainty. A Bloomberg poll of large-scale money managers found that all of them expect to maintain or add to their gold position this year.[19] 

Among the institutional money managers looking on gold fondly this year is Eric Sterner, chief investment officer at multi-billion-dollar hedge fund Apollon Wealth, who recently told Investment News, “I’m bullish on gold in 2024 for several reasons, including stubborn inflation, geopolitical tensions and conflicts, and the Fed near, or potentially at the end, of its hiking schedule.”[20] 

In reference to the popularity of gold among larger money managers as an uncertainty hedge, Jaspar Crawley, head of institutional investor relationships at the World Gold Council, said, “People are looking for things that really do move differently and gold does that. Diversification has now become a real thing.”[21] 

Individual investors who seek to limit the negative influence of uncertainty on their own holdings may themselves ponder the potential benefits of doing so by acquiring precious metals – to include owning them through a gold IRA 

To be clear, concluding metals might be a suitable component of one’s long-term savings regime ultimately is a decision each must make for himself. What isn’t one’s own decision, however, is whether uncertainty is to be a part of the economic environment. It just is. And given that, astute investors will recognize the importance of always being prepared to manage its potential impacts…in whatever way they think is best. 





[1] Bureau of Labor Statistics, “Labor Force Statistics from the Current Population Survey” (accessed 3/7/24). 
[2] Department of Commerce, “By the Numbers: U.S. Economy Grows Faster than Expected for Year and Final Quarter of 2023” (January 26, 2024, accessed 3/7/24). 
[3] ABC News, “US economy grew solid 3.2% in fourth quarter, a slight downgrade from government’s initial estimate” (February 28, 2024, accessed 3/7/24). 
[4] US Inflation Calculator, “Historical Inflation Rates: 1914-2024” (accessed 3/7/24). 
[5] Lauren Fedor, Eva Xiao and Oliver Roeder, Financial Times, “Only 14% of US voters say Joe Biden has made them better off” (November 13, 2023, accessed 3/7/24). 
[6] Megan Brenan, Gallup, “Biden’s Job Approval Edges Down to 38%” (February 23, 2024, accessed 3/7/24). 
[7] The Conference Board, “US Consumer Confidence Retreated in February” (February 27, 2024, accessed 3/7/24). 
[8] Bureau of Labor Statistics, “The Employment Situation – December 2023” (January 5, 2024, accessed 3/7/24). 
[9] Marijn A. Bolhuis et al., National Bureau of Economic Research, “The Cost of Money is Part of the Cost of Living: New Evidence on the Consumer Sentiment Anomaly” (February 2024, accessed 3/7/24). 
[10] Ibid. 
[11] Ibid. 
[12] Ibid. 
[13] Ibid. 
[14] Ibid. 
[15] Ibid. 
[16] Ibid. 
[17] World Gold Council, “Gold Demand Trends Full Year 2023” (January 31, 2024, accessed 3/7/24). 
[18] World Gold Council, “2023 Central Bank Gold Reserves Survey” (May 30, 2023, accessed 3/7/24). 
[19] Investment News, “Gold continues to shine as a hedge against uncertainty” (August 23, 2023, accessed 3/7/24). 
[20] Gregg Greenberg, Investment News, “Should advisors go for the gold in 2024?” (November 28, 2023, accessed 3/7/24). 
[21] Investment News, “Gold continues to shine.”  
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