By John W. Schoen Senior Producer
msnbc.com
updated 4/22/2011 9:39:52 AM ET 2011-04-22T13:39:52

Over the past year, the government index that tracks consumer prices has risen by 2.7 percent. That means your cost of living has risen by the same amount, right?

Not exactly. Unless you’re a very unusual shopper, changes in prices probably have had a much different impact on your budget than the government’s widely watched inflation barometer, the Consumer Price Index, would lead you to believe.

Like most national economic statistics, the CPI was created to take a high-level snapshot of conditions affecting the entire U.S. population. The CPI has a huge impact. Among other things, it’s used to determine cost of living increases for a variety of public and private wages and benefits as well as government disability and retirement programs, including Social Security.

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But just as the median home price reflects the value of very, very few individual homes, the CPI is designed to produce a single data point that measures the monthly change in prices paid by a wide range of individuals. That’s the main reason your household budget doesn't track well with month-to-month changes in the CPI.

“The notion of an average consumer is an abstraction," said Jonathan Church, an economist who tracks prices at the Bureau of Labor Statistics' Office of Prices and Living Conditions. "Nobody goes out and buys 80,000 goods and services in 25,000 outlets, which is what we do.”

In fact, the BLS does not actually buy those items, but government workers do go shopping to figure out the prices, including sales tax. They take the resulting prices and crunch the numbers into more than 200 categories in eight major groups. Over time, as spending patterns change, the so-called basket gets tweaked.

Often one item may represent thousands in the category. BLS shoppers, for example, may use a 4.4-pound bag of golden delicious apples, extra-fancy grade, to represent the entire apples category. If you crave Cortlands, your personal apple inflation rate might be different.

While the BLS basket is structured to reflect the widest population, shopping habits vary widely depending on income and other factors. Wealthier households, for example, spend more on discretionary items like recreation or entertainment. Lower-income households spend a bigger portion of their weekly budget on gasoline and food, so they get hit much harder with price increases of those items.

A household with four teenage girls will feel the effect of changes in clothing prices much more heavily than a retired couple who has a full closet and no longer maintains an office wardrobe. On the other hand the retired couple will feel the effect of rising health care costs more acutely than most single people in their 20s.

Another reason the Consumer Price Index seems to misstate the "true" rate of inflation is because many economists focus on the so-called "core" CPI rate, which excludes volatile food and energy prices.

The "core" CPI is up only 1.2 percent over the past year, but many consumers rightly complain that figure understates the true inflation rate. But economists, including policymakers like Federal Reserve Chief Ben Bernanke, say the core rate gives a clearer picture of persistent inflation trends.

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Nobody suggests that higher food and energy prices don’t matter, and their volatility has an outsized impact on consumer psychology. Simply put: People pay much more attention when prices are rising than when they're falling. Despite a recent, sharp run-up, the price of gasoline today is still lower that it was in the summer of 2008, when pump prices peaked at well over $4 a gallon.

“The price has gone down more than $2 since then and come up more than $1 since last November," said Michael Montgomery, a senior economist a HIS Global Insight. “But that dollar move since last November is the one people remember.”

Price hikes for food and energy also make us feel worse, say economists, because they’re among the most visible. As anyone who drives a car is painfully aware, few other products require that you stand and stare at the price, in giant lettering, for several minutes every time you consume the product. If you shop for food once a week, it’s hard not to notice when your favorite box of frozen pizza rings up 10 cents higher at the register than it did last week.

Story: McDonald's warns of higher food inflation

But the impact on your total budget is much less than, say, the money you may be saving the next time you buy a flat-panel TV. A $100 price break on a new 42-inch television will buy a lot of boxes of frozen pizza. The average television set in the BLS shopping basket costs 85 percent less than the one used in the calculation a decade ago.

Still, at least once a week, you’re entitled to grumble about how much more you're spending on pizza.

Many prices can be tough for the average shopper to track without the rigorous approach of the BLS. For example, you can ask your favorite consumer electronics retailer to shoot you an e-mail when a better deal comes along on that new tablet computer you have your eye on. But how many times have you bought the same piece of clothing twice within a year?

Quick: Since 2005, have clothing prices gone up or down?

Answer: Neither. They’ve barely budged.

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Video: Pain at the pump: Could gas reach $6?

  1. Transcript of: Pain at the pump: Could gas reach $6?

    WILLIE GEIST, co-host: If you're driving to grandma's house for Easter , it's going to cost you. The national average for a gallon of regular unleaded gas now stands at $3.85. That's 99 cents higher than what we were paying at this time just last year. NBC 's Mike Taibbi is in Chicago , where folks are feeling that pain at the pump. Mike , good morning.

    MIKE TAIBBI reporting: Willie , good morning to you. Yeah, rainy Chicago today . Here drivers are already paying $4 plus, in most cases plus a lot. At this Mobile station it's 4.599 for a gallon of regular, unless you're willing to also buy a car wash . Fat chance on a day like today . President Obama says Americans are so concerned he's now asked the Justice Department to look into all the reasons why the price at the pump is climbing so fast. To say the price of a gallon of gas is rising hardly tells the story. It's been a day-by-day climb for the past month with no relief in sight.

    Unidentified Man #1: Oh, when I pulled up to the gas station , I said -- I thought I'd probably have to get a second mortgage on my house to pay for it, it was so high.

    Unidentified Man #2: I don't like it, but I don't feel like I have any control over it.

    TAIBBI: In fact, six states and the District of Columbia are now averaging more than $4 for a gallon of regular.

    President BARACK OBAMA: Every time you go to work, a big chunk of your paycheck is being eaten up.

    TAIBBI: That's why President Obama , in Reno , Nevada , Thursday, to talk about the national budget , took time out to talk about the impact of gas prices on household budgets and about efforts to minimize the pain at the pump.

    Pres. OBAMA: Attorney general's putting together a team whose job it is to root out any cases of fraud or manipulation in the oil markets that might affect gas prices , and that includes the role of traders and speculators. We're going to make sure that nobody's taking advantage of American consumers.

    TAIBBI: But industry analysts see little relief on the horizon.

    Mr. ROBERT SINCLAIR (AAA New York): It's hard to predict where gasoline prices will go exactly. It seems that all the stars are aligned right now for gasoline prices to continue to climb, at least in the short term.

    TAIBBI: The reasons: a weak dollar, continuing unrest in the Middle East , an increasing demand for oil and energy products in the summer months, all leading to the possibility of a gas price surge even beyond today's grimmest predictions.

    Mr. RICHARD HASTINGS (Strategist, Global Hunter Securities): If we get a hurricane season when -- that hits the Gulf of Mexico in just the wrong spots, you're going to get a gasoline spike. It is really quite possible that you could blow well above $6 if we have a bad scenario late in the summer this year because of hurricane location.

    TAIBBI: But for some drivers, the car will be in the garage long before that.

    Unidentified Man #3: If the prices go up to 5 bucks, I'm definitely riding my bike every day I go to work, for sure.

    TAIBBI: Well, if you have to drive and you're cruising around looking for the cheapest price, don't forget to keep one eye on the fuel gauge. AAA is reporting a big increase in the number of road service calls for frustrated drivers who simply run out of gas. Willie :

    GEIST: And, Mike , those numbers over your shoulder are absolutely staggering.

    TAIBBI: I know, I know.

    GEIST: Mike Taibbi , thanks. Lou Ann Hammond is the CEO of drivingthenation.com. Lou Ann , good morning.

    Ms. LOU ANN HAMMOND (Drivingthenation.com): Good morning.

    GEIST: OK, so the trends here are not good. Gas prices have climbed every day for the last month. We've now seen six states already over $4 a gallon . Mike just reported it could go up to $6 a gallon in some places by this summer. What's behind this?

    Ms. HAMMOND: You know, it used to be that America had so much gasoline that they could use. We could get it from anywhere. But Libya being offline right now, 2 to 3 percent, that's huge because we have emerging countries and they're using a lot more gasoline than they used to do.

    GEIST: Well, we just had that report from Libya . The violence in Libya has lead to Moammar Gadhafi stopping the exporting of oil, but the truth is the US doesn't get much oil, if any, from Libya . So why does that affect prices here?

    Ms. HAMMOND: Because other countries have to get it somewhere else. And they -- they'll get some of what we're using and they'll pay more for it than we would have paid. So it takes that supply pie and you have to divvy it up in different ways.

    GEIST: So this is a supply problem?

    Ms. HAMMOND: It's a supply problem because we have people that won't -- that don't want to use less. And so we -- it does make the demand go up.

    GEIST: Interesting yesterday that President Obama created this task force. He said, quote, "to root out any causes of fraud or manipulation in the oil markets that might affect gas prices ." Is there really price gouging out there, or is this purely political so the president can say, 'Look, I'm concerned about oil and gas prices '?

    Ms. HAMMOND: I think the president is concerned. But I think every president that has had -- seen 5 or $6 a gallon has been concerned and has done this. So they've never really found price gouging , and so it's not going to -- probably not happen now. But it's a good political move.

    GEIST: And the ripples, of course, go far beyond the gas pumps with a story like this. Memorial Day , about a month or so away. People are going to be traveling a lot this summer. How does this impact consumer spending beyond what they're paying for gas?

    Ms. HAMMOND: It's going to impact it in every way. The difference, though, Willie , is in 2008 when we had this gas raise -- price raise again -- before, there -- the -- used cars weren't really in demand. But because of the Japanese shortage that we're having, because the used car prices are so high, that if they want to sell the pickups right now, you can sell it at a good price and get a decent car that gets 40 miles to the gallon ; some of them are getting 50 miles to the gallon . I was at the New York Auto Show for the last two days and the one question I asked every executive, 'Is are you ready?' And they have been saying, 'Yes, we're ready. We have Fiesta that gets 40 miles to the gallon . We have Mazdas that get 40 miles to the gallon . We have Chevy Volt that gets -- electric.' It's only fitting that tonight at the Tribeca Film Festival it's "Revenge of the Electric Car ."

    GEIST: Hm.

    Ms. HAMMOND: So...

    GEIST: Maybe a silver lining here that we're going to get better, more fuel-efficient cars out of all this. Gas at 3.85 a gallon and climbing. Lou Ann Hammond , thanks so much.

    Ms. HAMMOND: Thank you.

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Data: Latest rates in the US

Home equity rates View rates in your area
Home equity type Today +/- Chart
$30K HELOC FICO 4.74%
$30K home equity loan FICO 5.36%
$75K home equity loan FICO 4.72%
Credit card rates View more rates
Card type Today +/- Last Week
Low Interest Cards 10.91%
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Cash Back Cards 16.32%
16.36%
Rewards Cards 15.94%
15.96%
Source: Bankrate.com