Cost of Living Has Risen 20% Since 2021 — So Why Are Inflation Rates So Low?
Written by
Kerra Bolton
Edited by
Ashley Barnett
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Determining why consumers continue to pay more for everything from a carton of eggs to rent seems like solving a complex math problem.
The cost of living for most basic goods and services has increased by 20% in the past three years. Yet, at 2.5%, inflation is down from 3.4% last year, which seems relatively low in comparison.
In addition, the Federal Reserve recently cut the interest rates by half a percentage point, making it cheaper to buy a house or a car. Nevertheless, consumers say they still feel the pinch despite falling inflation and interest rates.
Cost of Living
In simple terms, the cost of living measures how much money the average American consumer needs to cover basic expenses like housing, food, healthcare, and transportation in a certain location.
The cost of living illustrates how expensive or affordable it is to live in a particular place. It can vary depending on where you live and changes over time due to factors like your local economy or inflation. When the cost of living increases, it means you need to spend more money to experience the same lifestyle.
Inflation
Inflation is the rate of increase in prices over a given period of time. It can be used as a broad measure or narrowly calculated.
Most people are familiar with inflation being used in narrow circumstances. For example, how much did a carton of eggs cost last year compared to this year?
Government agencies like the U.S. Bureau of Labor Statistics conduct household surveys to identify commonly purchased items like food, housing, and gas and track their costs over a period of time, usually a year.
The cost of daily household items at a given time compared to a base year is the consumer price index (CPI). The percentage change in the CPI over a certain period is consumer price inflation, and according to the International Monetary Fund (IMF), a United Nations financial agency, it is the most commonly used inflation measure.
Putting It All Together
Wayne Winegarden, an economist at the Pacific Research Institute, said the cost of living examines the impact of past price increases on the consumer’s current well-being. In contrast, inflation measures more recent price increases.
Winegarden said to imagine a cart of groceries that cost $100 in 2021, $118 at the end of 2023, and $120 today. It would be correct to say that the cost of living increased by 20% if you compare the price of the same groceries in 2021 ($100) vs. today ($120).
“Inflation, on the other hand, looks at how much the price of groceries increased last year compared to today,” Winegarden said. “In this case, the difference between 2023 ($118) and 2024 ($120) is a bit under 2% inflation.”
For economists like Winegarden, the distinction is important because it means that prices are no longer rising quickly, which means that inflation is down.
“Families worry about the cumulative increases in the price of living over the past couple of years, which is why they are concerned,” Winegarden said. “The cost of living is more expensive today than three years ago. Both perspectives are correct, but they measure different things.”
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