Consumer costs skyrocket while inflation falls flat

Consumer prices are higher this year, but some specialists say even the measured rise in inflation does not reflect the rapidly rising costs consumers encounter every day.

G.B. Bose, a Bethesda financial executive and father, was shocked when he took his family to the movies recently and had to pay $25 for popcorn and snacks.

“It was $3.40 for one scoop of ice cream. Is that legal?” he joked, noting that a scoop was only 25 cents in the 1970s when he arrived from his homeland of India.

“I keep hearing that inflation is under control. But are prescription prices under control? Gas? I don’t think so,” he said.

The much-watched Consumer Price Index (CPI) has doubled to 3.5 percent since 2002, fed mostly by higher energy prices. The pace of increase in the last three months was faster still at 6.2 percent, according to the Labor Department, which publishes the index.

But outside the volatile food and energy areas, according to the surveys, prices appeared to be tame. In April, the so-called “core” price index — which covers everything from clothing to medical care and housing — did not increase at all.

The absence of core inflation sent Wall Street markets into a frenzy. But the report only raised eyebrows among some consumers who say they are spending more and more each month to get the same amount of health care, education and other core items.

Some economists think the price measure is not reflecting everyday realities. They note a disconnect between the government’s inflation reports and what consumers say they are experiencing.

A critical area of contention is housing, which constitutes a third of the overall price index. Nearly 70 percent of Americans own their homes, and they have seen steep increases in their home values in the last five years — culminating in a 15 percent jump in home prices nationwide in the past year.

Home prices in the Washington area have doubled or tripled in many neighborhoods, and the cost of maintaining, heating, cooling and improving homes also has been soaring.

Yet the department’s housing cost index rose only by 2.7 percent in the past year — a discrepancy that has economists scratching their heads.

“The core CPI considerably misrepresents what is happening in the housing market,” said John Silvia, chief economist at Wachovia Securities, who added it’s “time to can the core.”

The problem with the housing index, economists say, is it does not measure the cost of owning a home but rather reflects the cost of renting, which has been rising much more slowly than the cost of home purchases and upkeep.

While over time the cost of renting normally rises and falls with the cost of owning, the relationship can at times be distorted. Recently, the cost of rent has fallen dramatically as a percentage of a home’s price — an unusual development that economists say could be evidence of a price bubble in the housing market.

Normally, the annual cost of rent should be between 6 percent and 10 percent of the home price, according to John P. Calverley, chief economist at American Express Bank.

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