Inflation is well below the Federal Reserve's target rate, but that's not what many Americans are experiencing when they pull out their checkbooks.
Even though the economy is experiencing very low inflation, with the annual rate coming in below 2 percent during the past two years, American households still feel like they are getting socked by higher prices. One reason is that the post-recession years are witnessing a divide between the prices of goods, such as cereal or television sets, and services, such as cable television or health care.
During the 12 months ended in May, the prices for goods declined 3.3 percent, while services rose 2 percent, according to The Wall Street Journal. The cost of services is rising partly because of the increase in rents, which is making it more expensive to operate businesses and leads to higher service costs for consumers. Service providers are also finding more pricing power, which means that many are raising prices simply because they can.
Take cable service providers, such as Comcast. Because many operate with little local competition (not to mention a lack of global rivals), there's little incentive to keep rates lower. That's borne out by the split between inflation for goods and services in the TV industry. The price of a new TV has plunged 58 percent in the past five years, thanks to a glut of rival products and a saturated market for flat-screen TVs that has prompted manufacturers to slash prices.
Cable TV service, on the other hand, has jumped almost 14 percent during the same period, The Journal noted. Providers such as cable companies often lack competition in local markets, making their services relatively price insensitive. Basic cable prices have increased four times the rate of inflation, according to an FCC report issued last year.
Aside from a lack of global competition, the other reasons for why the cost of services are rising include higher labor costs and slower productivity, the publication noted.
Consumers may be more keyed into the higher costs for services since it represents two-thirds of the U.S. economy. But there could be yet another reason for why Americans are feeling pinched in a time of low inflation: Stagnant or even declining wages.
The hourly wage last year had about the same purchasing power as it did in 1979, after adjusting for inflation, according to Pew Research. Still, once gains to the top earners were stripped out, real wages for workers in the bottom of the income distribution had actually declined, with those in the lowest decile seeing declines of 3.7 percent.
That may explain why a majority of Americans say their family's income is falling behind the cost of living. When wages are stagnant or even declining, even a small increase in the cost of goods and services can pack a wallop.
In the meantime, it appears consumers aren't all that hopeful those trends will change. Consumers expect median inflation to rise by 3 percent, yet they expect median earnings growth of just 2.5 percent, according to the Federal Reserve Bank of New York's Survey of Consumer Expectations that was published today.