On Thursday, the Bureau of Labor Statistics released the latest consumer price index report for December, which showed an annualized inflation rate of 6.5%. This means that the federal government thinks prices have increased 6.5% since one year prior. Does anybody actually believe this? Not me!
In my experience, inflation is running much hotter than what is reported by the government. If inflation was only 6.50%, that would mean that $5 items a year ago would now cost $5.33 on average. Items that cost $1,000 a year ago would be around $1,065 today on average. Does this reflect your real-world experience? It doesn’t reflect mine at all.
Prices have gone up much more than that. And if they haven’t gone up, it’s a good bet the portions or sizes are smaller than what you purchased a year ago.
Real-world inflation is running much higher than reported
I don’t think many people actually believe that prices are up a mere 6.5% from one year ago. I know I don’t, because my eyes tell me otherwise when I shop for groceries or go to a restaurant. Prices are up – a lot in some cases.
Restaurant portions are smaller and prices are higher
My wife and I recently ate at a restaurant we’ve enjoyed going to for a number of years now. The prices are on average more expensive than the typical restaurant, but the food is absolutely excellent. It’s a splurge we enjoy for special occasions like anniversaries and birthdays.
The portions were never massive, but I noticed that they had gotten significantly smaller than the last time we were there. The prices were about the same, but we were getting less food for the money.
I’ve noticed this at a few other restaurants as well.
I worked for a restaurant in college and noticed that whenever the minimum wage increased, new menus were rolled out – with slightly higher prices, of course. Restaurants today are doing the same thing; they’re rolling out new menus, reducing choices, reducing portions, and charging higher prices.
“Shrinkflation”: Grocery portions are smaller
It’s interesting how some food manufacturers just happen to roll out newly-designed packaging when they want to charge more. I think it’s how they disguise that you’re getting less for your money. I’ve seen quite a few products get new packaging recently.
For some products, it’s not always easy for a manufacturer to hide the “shrinkflation”. One package of hamburger thins we’ve purchased for years went from a package of eight buns to six for the same price. I believe that works out to be a 33% price increase, effectively.
Cereal boxes have gotten pretty skinny lately as well, I’ve noticed. The graham crackers we’ve purchased for years for the kids have gotten thinner and there’s fewer of them in the box.
I don’t exactly track portions for what we buy, but it’s obvious that portions for many products are smaller.
It’s like when you see a niece, nephew, or grandchild for the first time in six months. You can’t say how tall they were before, but you can still tell they’ve grown. It’s the same thing for grocery items we’ve purchased for years. It’s often pretty obvious that the portions are significantly smaller these days.
Grocery prices have increased significantly
A decent loaf of bread is around $5, meat is way up, and eggs are insane right now. A friend recently sent a photo of an empty rack at Costco that normally contains stacks of eggs. He checked with another local grocery store and discovered that they had eggs in stock, but they came in packages of 18 eggs for $18! Are you kidding me? A dollar an egg? Wow!
Real-world experience tells me that grocery prices have increased far faster than 6.5% in the last year. I’ve yet to come across anybody who disagrees.
To underscore this point, check out this video that recently went viral:
@sidemoneytom Prices compared to one year ago are up at a minimum 50% on all products at my local grocery stores and Costco #inflation #prices #costco #2023 #fyp #expensive #groceryshopping ♬ original sound – Tom Collins
My wife does the shopping at Costco and I don’t think she would disagree with anything this guy said.
Prices are up far more than just 6.5%. If prices have only increased around 6.5% from a year ago, then that means a $300 basket of groceries at Costco a year ago should only cost around $320 today. Does anybody actually believe that? I know I don’t. The consumer price index doesn’t reflect reality at all.
Inflation hurts those on fixed incomes the most
I interact with a lot of retirees because of this website and my line of work. Social Security may have handed out an 8.7% cost-of-living raise this year, but it doesn’t cover the real-world increase in the cost of living. I hear it when I interact with people.
Inflation hurts those who are retired and on a fixed-income the worst. When you’re retired, you don’t have the same capacity to earn as you did in your younger years. It’s not as easy to earn more money to keep up with a higher cost of living.
Social Security may give out raises, but they’re based on drastically understated increases in the consumer price index. I know inflation is running higher than reported because I see it with my own eyes and I hear it from everybody I talk to.
Will inflation get better?
Can we hope that inflation will come down in 2023? Honestly, I’m not that hopeful. We may be in for a long slog. As in the 1980s, it may take a deep recession and significantly higher interest rates to get inflation under control.
There are signs we’re already in a recession, but the unemployment rate is still low. The Fed will continue to increase rates until they get the recession they need to get inflation under control.
Back in 1981, inflation peaked at 9.8%. As you can see in the chart below, it took until 1983 and 1984 to get it back to around 5%. It wasn’t until 1987 that inflation finally dropped back to 3%.
I hate to say it, but it may be a while before we see relief from the price increases. I hope I’m wrong on that.
If you’re retired and getting squeezed by the rising cost of living, home equity could be part of the solution. A HECM reverse mortgage can help you eliminate mortgage or other debt payments, supplement your income, or supplement your retirement assets. Yes, rates have risen, but the reverse mortgage is still a great solution for many retirees.