The Inflation Illusion
Why your wallet tells a different story than the headlines
“Inflation is coming down.”
We’ve heard that phrase over and over again during the past year.
Yet every time I walk into H-E-B or Costco, I leave wondering how I managed to spend another $200 or $300 on what feels like half a shopping cart.
If inflation is supposedly under control, why doesn’t it feel that way?
That question was the basis of my latest conversation with economist Dr. John T. Harvey, better known as the “Cowboy Economist.” While we don’t always see eye-to-eye on economic policy, we both agree on one important point:
The numbers policymakers focus on aren’t always the numbers consumers actually experience.
And that’s where I think much of the frustration surrounding inflation begins.
Inflation Isn’t Prices
One of the biggest misconceptions about inflation is believing that when inflation falls, prices fall.
They don’t.
Inflation simply measures the “rate at which prices are increasing”.
If inflation falls from 9% to 3%, groceries aren’t suddenly cheaper. Gasoline doesn’t magically become affordable again. Insurance premiums don’t reset.
Prices simply continue rising, just not as quickly.
That’s an important distinction because consumers don’t experience inflation as a percentage.
They experience it every time they swipe their credit card.
Every trip to the grocery store.
Every utility bill.
Every insurance renewal.
Every mortgage payment.
The inflation rate may be slowing.
The price level isn’t.
The Numbers We Feel
One of the topics that has always puzzled me is why so much emphasis is placed on Core CPI, an inflation measure that excludes food and energy.
I understand the academic reasoning. Food and energy prices are volatile.
But they’re also unavoidable.
Dr. Harvey didn’t mince words when I asked him about it.
“I have no idea why the Fed does that. I think it’s a terrible idea...they pull out the very thing that is the most core part of our pocketbook.”
Exactly.
Consumers don’t buy “core inflation.”
They buy groceries.
They fill up their gas tanks.
They pay electric bills.
They insure their homes.
Those aren’t optional expenses. They’re the very things that determine whether a family feels financially secure.
Headline inflation may fluctuate more than core inflation, but it’s headline inflation that shows up in our monthly budgets.
Then Came “Trimmed Inflation”
Just when many Americans were beginning to understand headline versus core inflation, another measurement entered the conversation: Trimmed Inflation.
The idea is simple enough.
Remove the largest price increases and decreases to produce a smoother inflation reading.
From a statistical standpoint, I understand why economists find it useful.
But from a practical standpoint?
It often feels like we’re measuring everything except what families are actually paying.
As I joked during our conversation:
“It’s starting to feel like a parlor trick.”
Every new adjustment seems to move us one step further away from the consumer experience.
The danger isn’t that these measurements are mathematically wrong.
The danger is believing they tell the entire story.
They don’t.
Inflation Is About Incentives
One part of our discussion that really resonated with me had very little to do with CPI.
It had everything to do with incentives.
Dr. Harvey made an observation that I think is worth remembering:
“You have to think about who’s gaining and who’s losing.”
That applies almost everywhere.
Homeowners generally don’t want housing prices to fall.
Investors don’t want asset prices declining.
Corporations don’t want shrinking profit margins.
Governments certainly don’t mind rising tax receipts that accompany higher nominal prices.
Everyone has an incentive.
Understanding those incentives often explains far more than the inflation report itself.
Not All Inflation Is Created Equal
Another important distinction Dr. Harvey made was between demand-pull inflation and cost-push inflation.
Demand-pull inflation occurs when consumers have strong demand for goods and services. Businesses respond by expanding production, hiring workers, and investing in new capacity.
That’s often a sign of a healthy economy.
Cost-push inflation is different.
It stems from supply shortages; oil shocks, wars, disrupted supply chains, or rising production costs.
Higher interest rates don’t produce more oil.
They don’t reopen shipping lanes.
They don’t manufacture semiconductors.
They simply reduce demand enough that consumers buy less.
That’s an important distinction that often gets lost in the debate.
Where I Still Have Questions
Dr. Harvey and I also discussed Modern Monetary Theory, government spending, the national debt, and whether the Federal Reserve has the tools to control inflation.
As many of you know, we don’t always agree.
That’s healthy.
Good conversations shouldn’t end with everyone thinking exactly the same way.
They should leave us asking better questions.
Personally, I still wrestle with whether persistent government deficits ultimately become inflationary over the long run.
I remain concerned about rising federal debt, asset inflation, and the incentives created by continually expanding government spending.
Dr. Harvey approaches those issues from a different framework.
That’s precisely why I enjoy having him on the show.
Different perspectives force us to challenge our own assumptions.
My Takeaway
Inflation isn’t difficult because the math is complicated.
It’s difficult because the conversation often becomes disconnected from everyday life.
Consumers don’t wake up wondering what Core CPI printed this month.
They wonder why groceries cost another $40.
Why insurance premiums increased again.
Why their paycheck doesn’t seem to stretch as far as it did just a few years ago.
Economic data should help explain reality—not explain it away.
That doesn’t mean headline inflation is a perfect measure.
It isn’t.
Nor is core inflation.
Or trimmed inflation.
Every measurement has strengths and weaknesses.
But if our inflation reports no longer resemble the financial reality families experience every day, perhaps it’s worth asking whether we’re measuring the right things.
Sometimes your wallet tells you more than the headline.
Watch the full episode here: Inflation if Falling, So Why Are Prices So Damn High?