Wednesday’s consumer price index showed a 9.1% yoy increase. Following similar news last month, the Federal Reserve hiked interest rates by 0.75 percentage point. This means double trouble for middle- and low-income Americans: increased spending by the former and job losses by the latter. But the economic pressures on these Americans is not a new phenomenon, a truth that voting patterns have revealed better than official inflation data.
Take the swing districts that decided the 2016 election. In Freeborn County, Minnesota, on the Iowa border, Barack Obama dominated the vote in 2008, winning by a margin of 17% and 14% in 2012 – only for Donald Trump, who won 17% in 2016 and 16% in 2020.
Americans in swing counties vote for candidates they believe would bring them some measure of prosperity. And both party governments over the past 20 years have made it harder for those voters to achieve a decent standard of living as prices have consistently risen faster than wages, despite government headline statistics to the contrary.
To measure price changes, the Bureau of Labor Statistics looks at a basket of 80,000 commodities and assigns each a specific percentage. The composition of the shopping basket remains essentially the same over time and includes luxury goods such as expensive watches and second homes.
To determine the true cost of living for middle- and low-income America, the Ludwig Institute for Shared Economic Prosperity created our own Cost of Living Index, which includes only the bare essentials a family needs to survive — housing, food, fuel, and health care — and leaves Rolexes and pieds-à-terre aside. Our index, which we call the ‘real cost of living’, also swaps items you might have needed in 2008, like a landline phone, for items you need today, like a smartphone.
Another issue with CPI is how it weights housing. Housing accounts for 33% of the CPI, but within the housing component, CPI estimates mortgage and other home ownership costs at around 78% and rental costs at just 22%. Rising rents don’t affect CPI as much as rising house prices.
According to the Minnesota Housing Partnership, one-third of the state’s homes are renters, “one of the largest renter populations in the upper Midwest.” The American Community Survey shows renters are almost twice as likely to spend 30% or more of their income on housing as homeowners. The CPI does not do justice to their situation.
Similarly, CPI allocates only 8% of its basket to medical costs. At best, with an employer-sponsored family health insurance plan — which fewer than half of Americans have — the average worker enrolled in a family plan in Minnesota paid an annual premium contribution of $5,635 and an average deductible of $4,581. If a family earns the median state income of $73,000, that would be 14% of their household budget.
In 2016, the median household income in Freeborn County was $49,000. For a typical family with one child, renting a modest two-bedroom apartment would have cost around $7,800. Food accounts for about $3,500. One car would have cost about $14,500 to maintain and operate. If the family had had an employer-provided health insurance plan, the out-of-pocket expense would have been approximately $1,600. After clothing, utilities, and basic household items, and assuming no childcare expenses, the family had total expenses of about $35,000.
With $7,459 in taxes, this one-child family would have had just 13% of their annual income — $6,541 — for retirement, college funds, emergency spending, and maybe a vacation. Imagine the cost of living for a family with more than one child, no employer-sponsored health insurance, and no free childcare.
Back in 2016, many Americans were struggling to make ends meet. In his campaign speeches, Mr. Trump blamed globalization for the decline of American manufacturing. He promised good jobs. Voters in places like Freeborn County, who felt the American Dream had left them behind, believed him.
When we contrast median income and the true cost of living in areas that have benefited Mr. Trump, the economic struggles of these Americans come into focus. Post-pandemic inflation frenzy makes the problem seem fresh, but our index shows rising cost of living has outpaced wage growth since at least the last 20 years.
Freeborn County was typical of counties that went for Mr. Trump: Even middle-income residents were squeezed in. As the midterms approach, both parties should pay more attention to the true cost of living for Americans. The economic end result for voters will also be the end result for their representatives.
Mr. Ludwig, a former U.S. Comptroller, chairs the Ludwig Institute for Shared Economic Prosperity, where Ms. Dayoub is a research fellow.
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https://www.wsj.com/articles/cpi-doesnt-capture-true-cost-of-living-trump-country-healthcare-housing-rental-inflation-prices-11657898754 CPI Doesn’t Capture the True Cost of Living in Trump Country