Why Everything Feels More Expensive Than Inflation Says It Should

Summary

Nick argues that U.S. inflation has been persistently understated by official measures, which he believes helps explain why the cost of living feels higher than reported inflation suggests. He connects this to financial repression: when inflation exceeds the government’s borrowing costs, the real value of government debt declines. For that reason, he considers sovereign default less concerning than the social and political consequences of prolonged inflation.

Inflation Measures and Methodology

• Headline CPI measures price changes across a basket of goods and services. Core CPI excludes food and energy, which Nick describes as more volatile. The Federal Reserve’s preferred PCE measure uses different weightings.
• Nick’s former research firm created the Pardini CPI, core CPI, and PCE measures. They use government weightings but substitute private-sector data for some government survey inputs.
• For housing, he says the Bureau of Labor Statistics (BLS) relies on owner’s equivalent rent (OER)—a homeowner’s estimate of what their home could rent for. He considers this a lagging or inaccurate proxy for current housing costs.
• The Pardini CPI housing measure uses a weighted average of Apartments.com rent changes and the Zillow Home Price Index. Nick says this approach is more market-sensitive: it can show higher inflation during housing booms and more disinflation or deflation during housing downturns.

Key Figures Cited

• Since 1990, Nick estimates average annual inflation at about 3.7% using the Pardini CPI, compared with about 2.6% in government data—roughly 1.16 percentage points, or 30–35%, higher.
• He says a 2% official inflation rate would correspond to about 2.7% under his measure. Compounded over 30 years, he estimates the difference results in 128% more cumulative inflation than under the official measure.
• For 2021, he cites Pardini CPI inflation of about 17.5%, compared with 7.45% for headline CPI. Pardini core CPI was 13.7%, compared with about 7.1% for government core CPI.
• Since roughly 2017–18, he estimates average inflation at about 4.3%, compared with 3.2% in BLS data.
• He says official CPI and his measure tracked relatively closely in the 1990s. His measure was higher during the 2000s housing boom, lower during the housing bust, and generally higher again after 2012.
• He says U.S. nominal policy rates were near 0% for much of the post-2013 period, while inflation was higher under his measure.

Debt, Policy, and Risks

Nick describes financial repression as keeping real interest rates negative so inflation erodes the real value of debt. He says this has been occurring since around 2000 and estimates that it has reduced the real burden of U.S. debt 30–35% more than official inflation figures imply.

He says governments may tolerate moderate inflation to reduce debt burdens, but the strategy can become politically unsustainable when shocks or fiscal stimulus push inflation higher. He points to the pandemic response and supply shocks as examples.

His main concern is not an imminent U.S. default, but whether persistent inflation and wages failing to keep up with living costs could cause social and political strain. He argues that larger deficits could require more future inflation to contain the debt burden.

Nick says government incentives to understate inflation may include limiting cost-of-living increases for Social Security and government pay, as well as slowing inflation adjustments to tax brackets, potentially contributing to bracket creep.

Market Implications and Cautions

Nick says risk assets can perform well when inflation is moderate or perceived to be moderate, but sustained inflation above roughly 4% can become a headwind.

• Bonds and Treasuries: Higher inflation may require higher nominal rates to prevent real rates from falling. Bond prices generally move inversely to interest rates.
• Real estate: Higher prevailing rates raise the returns investors require from property, putting pressure on valuations and project economics relative to Treasuries.
• Stocks: Higher rates can weigh on valuations, while inflation can squeeze consumers and businesses and limit companies’ ability to pass on costs.
• Commodities: Nick says commodities may be an exception among risk assets during high inflation.

As a historical example, he says the stock market fell about 60–70% in real terms during the 1970s, depending on the index, despite being relatively flat in nominal terms. He cites severe bear markets in 1973 and 1980–82.

He rejects estimates such as those from ShadowStats or the Chapwood Index that claim inflation averaged around 9% annually since 1990. Instead, he estimates that inflation was roughly 30–35% above official inflation on average.

Disclosure

Nick says his comments are not investment advice. He recommends doing independent research or consulting an adviser for personal financial questions.

Presenter and Sources

Presenter: Nick Pardini, Analyzing Finance with Nick. No other presenters appear in the subtitles.

Sources and figures cited by Nick: Milton Friedman (quoted at the start); BLS CPI data; Apartments.com; Zillow Home Price Index; IMF Finance & Development (2011), including work by Carmen Reinhart, Kenneth Rogoff, and Maria Sbrancia; a Reinhart–Rogoff working paper; Richmond Fed publications; Janet Yellen’s Brookings Institution speech; and BlackRock Institutional Research and unnamed major investment banks.