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Dec 7, 2021

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Charles serves as CCLP's Income and Housing Policy Director using data and research to support our efforts to stand with diverse communities across Colorado in the fight against poverty. Staff page ›

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Making cents of the headlines, part 1: How do we measure inflation?

by | Dec 7, 2021

Income, Research and Policy Analysis

stock photo of balloon wrapped in measuring tape to represent inflation

Headlines about inflation are everywhere you look these days. And with good reason. Inflation as measured by the Consumer Price Index (CPI) increased by 6.2 percent in October, well above the Federal Reserve’s long-term target of 2.0 percent.[1]

Given this overshoot, you may be wondering why the Federal Reserve or the federal government have yet to respond with interest rate hikes and price and wage controls like they did in the 1970s.  As policymakers on both sides of the aisle acknowledge, inflation tends to affect low-income folks most strongly — so shouldn’t we be doing more to address inflation?

Part of the confusion about the Federal Reserve’s (and the Biden Administration’s) stance on inflation comes from misunderstandings about how we measure inflation, and what the numbers we see in the headlines really mean.

First, let’s start with how we measure inflation in the United States using the CPI, the measure most quoted in the press.

The Consumer Price Index is based on the changes in price of hundreds of goods and services that the average consumer purchases. Items and services included in the CPI “basket” can be organized into over 200 categories, but always fall within one of the following major groups:[2]

  1. Food and beverages
  2. Housing
  3. Apparel
  4. Transportation
  5. Medical care
  6. Recreation
  7. Education and communication
  8. Other goods and services.

The prices of all the goods and services in the CPI basket are weighted to reflect consumer spending habits. The total price of the basket can then be compared to past months or years, to see how they changed over that period. The rate of change represents inflation.

Sounds simple enough, but there are several facts we need to consider when interpreting inflation data generated from the CPI:

Fact #1: We compare inflation to one year ago

An inflation rate of 6.2 percent in October 2021 does not mean that prices rose 6.2 percent, on average, from the previous month. Instead, it means that prices rose 6.2 percent from October 2020. Therefore, what was going on in our economy one year ago will influence the rate of inflation we measure today.

For example, the prices of items in the CPI declined from February 2020 to June 2020. The increase in the inflation rate during these months in 2021 likely had more to do with low prices in 2020 than with high prices in 2021. Similarly, when we look at the CPI for October 2020, we see that prices declined between October and November 2020. So part of the price increase captured in the 6.2 percent inflation rate for October 2021 includes price increases that simply returned to pre-October 2020 levels.

This doesn’t mean that prices for consumers aren’t rising, but it does mean we must consider the economic conditions from one year ago when interpreting what the current rate of inflation means for our economy.

Fact #2: Housing cost data can be unreliable

Another measurement issue arises with the way that the CPI accounts for housing prices.[3] Two components make up this measure:

  1. “Rent of primary residence”
  2. “Owners’ Equivalent Rent (OER).”

The first component is estimated simply by asking renters what they currently pay for housing. The second component, however, is based on what homeowners guess their house would rent for if they rented it to a tenant.

Unless a homeowner is up to speed on his or her local rental market, it would likely be difficult for them to accurately estimate this price. Indeed, according to the Roosevelt Institute, OER rose significantly faster than rents over the course of this year.[4] This is important because OER represents 25 percent of the CPI, so changes in the OER (what homeowners estimate the price of housing is) will have a much larger influence on overall changes in the CPI than the actual price of housing as captured through tenants’ rents.

Fact #3: Not Everyone Buys All of the Goods and Services Measured by the CPI

There are hundreds of items in the CPI, and not all of them are purchased by every consumer each month. As such, the rate of inflation captured by the CPI might not actually reflect the increase in prices experienced by consumers.

In addition, consumers may change their behavior in the face of price increases — by going without a particular good or service, or by substituting it with a similar, but less expensive, item. This highlights that it is important to understand which items in the CPI basket are driving inflation.

For instance, recent months have seen the prices of new and used cars increase dramatically due to production slowdowns during the pandemic. If consumers cannot afford to pay these higher prices, most will likely choose to put off buying a car until prices drop or their incomes rise.

On the other hand, inflation among essential items, like food or housing, cannot be put off and so have a much larger effect on the financial well-being of consumers. Understanding where inflation is having the greatest effect on consumers can help policy makers to devise targeted and effective relief.

Fact #4: There Are Multiple Measures of Inflation

The CPI is not the only measure of inflation published by the federal government.

The Bureau of Economic Analysis (BEA) releases its own inflation measure, known as the Personal Consumption Expenditures Price Index (PCE). Because it uses a different basket of goods and applies different weights to these goods than does the CPI, the rate of inflation as measured by the PCE tends to be lower than the CPI.[5]

The Bureau of Labor Statistics also releases multiple versions of the CPI. The default measure is formally known as the CPI-U, or the average measure of prices gathered from 75 urban areas across the United States. As such, there is an inflation measure for the Denver-Aurora-Lakewood urban area that tells us how prices have changed in Colorado’s major urban area. Year-over-year inflation in the Denver metro area was 4.5 percent in September compared to 5.4 percent across all urban areas included in the CPI-U.[6] This suggests that Colorado consumers are not experiencing the same magnitude of prices increases as consumers in other parts of the country.

Fact #5: Inflation Data Comes Without Context

Inflation on its own is not necessarily a bad thing. Prices typically rise year to year without creating major disruptions in our lives. Therefore, it is important to look to other economic indicators when evaluating whether inflation is threatening the health of our economy.

For example, comparing inflation rates with the rate of wage growth gives us a sense of how much inflation is eroding consumers’ spending power. If wages are rising at a similar rate as inflation, consumers can purchase the same amount of goods and services despite higher prices. For example, in Colorado, the average wage for a private sector worker increased by 6.6 percent year-on-year in September 2021, much faster than the rate of inflation. Even among workers in the leisure and hospitality sector, the lowest paid in the state, the average weekly wage increased by 16.9 percent in September 2021 from one year ago.[7] While we should interpret these averages with caution, they do suggest that wages for many workers increased faster than the rate of inflation in September when compared to one year ago.  Similarly, despite increasing prices, consumer spending and consumer confidence have remained strong throughout 2021.[8]

The importance of understanding measurement

Understanding the way we measure inflation in this country is fundamental to interpreting what monthly inflation figures cited in the press really mean, both for consumers and the health of our economy. This is especially important when evaluating which policies will be most effective in addressing inflation, and whether those policies will create more harm then good.

After a sustained period of inflation during the 1970s, the Federal Reserve, led by Paul Volcker, raised interest rates in an effort to curb price increases. While the Fed was successful, this success came at the expense of economic growth. The years following the Fed’s actions saw a recession and an increase in unemployment during the first two years of the 1980s.

Taking a similar approach to curb the inflation we are experiencing today could have disastrous effect on our current economic recovery. This does not mean we have no options to address the inflation we are currently experiencing, but that we should be cautious to ensure we are not tackling inflation at the expense of other important economic priorities, such as job growth.

The Bureau of Labor Statistics will release inflation estimates for November 2021 on December 10, 2021. You can find the November estimates, as well as data for previous months by visiting the CPI page on the BLS website. This next release will also include November 2021 estimates for the Denver-Aurora-Lakewood area.

About this series

CCLP will be releasing future blog posts on inflation, what it is, what causes it, and what impact it is having on the economic well-being of Coloradans. Our next blog post will discuss the causes of inflation and why it occurs. It will also examine if the inflation we are seeing today is cause for concern. We will follow-up with a post on what is driving inflation in the Denver-Aurora-Lakewood area and what state policy makers can do to address the sources of inflation as they look to the 2022 legislative session.

References

[1] October 2021 Consumer Price Index (CPI-U), U.S. Bureau of Labor Statistics. Accessed from https://www.bls.gov/news.release/archives/cpi_11102021.htm on 7 December 2021.

[2] “Consumer Price Index Frequently Asked Questions”, U.S. Bureau of Labor Statistics. Accessed from https://www.bls.gov/cpi/questions-and-answers.htm#Question_7 on 7 December 2021.

[3] Mason, J.W. and Lauran Melodia, “Rethinking Inflation Policy: A Toolkit for Economic Recovery”, Roosevelt Institute (2021). Accessed from https://rooseveltinstitute.org/publications/rethinking-inflation-policy-a-toolkit-for-economic-recovery/ on 7 December 2021.

[4] “Rethinking Inflation Policy”, Roosevelt Institute (2021).

[5] “Rethinking Inflation Policy”, Roosevelt Institute (2021).

[6] CPI estimates for the Denver-Aurora-Lakewood area are released every two months. After September 2021, the next and last release for 2021 will be for the month of November.

[7] State and Area Employment, Hours, and Earnings, U.S. Bureau of Labor Statistics.

[8] Bivens, Josh, “The Build Back Better Act’s macroeconomic boost looks more valuable by the day”, Economic Policy Institute (2021). Accessed from https://www.epi.org/blog/the-build-back-better-acts-macroeconomic-boost-looks-more-valuable-by-the-day/ on 7 December 2021.

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HEALTH:
HEALTH FIRST COLORADO (MEDICAID)

Health First Colorado is the name given to Colorado’s Medicaid program. Medicaid provides public, low-cost health insurance to qualifying adults and children. It is an entitlement program funded by the federal, state, and county governments and is administered by counties in Colorado. Those who are required to pay must pay a small co-pay when receiving certain health care services.

State Department: Department of Health Care Policy and Financing

Eligibility: Most adults 18 to 64 are eligible for Medicaid in Colorado if their household income is at or below 133% of the federal poverty limit (FPL). Pregnant women are eligible with incomes of up to 195% FPL, while children under 18 may be eligible if the live in a household with income at or below 142% FPL. Some adults over 65 may also be eligible for Medicaid.

Program Benefits: Through Medicaid, low-income Coloradans are eligible for a range of health care services at little to not cost. Services provided include doctors visits, prescription drugs, mental health services, and dental care. Co-pays for certain individuals may be needed for certain services.

Program Funding and Access: Colorado funds our Medicaid program through state and federal dollars. Medicaid is an entitlement program, which means that all who are eligible for Medicaid can access the program, regardless of the funding level in a given year. This does not mean that it is always easy to access Medicaid, even when eligible. And since the program is administered by counties, funding levels for county staff and other administrative roles can make it easier or harder for Coloradans to access the program. On top of this, not all medical providers accept Medicaid which limits the ability of Coloradans to seek health services even if enrolled, such as if the nearest provider is a 2+ hour drive away.

Note: This data is from before the pandemic and does not reflect changes in enrollment rules during the COVID-19 pandemic and public health emergency.

Statewide Program Access 2015-19: Over the study period of this report, an average of 89.0% of the population at or below 133% of FPL (i.e., the population who is likely to be eligible for Medicaid) were enrolled in Medicaid in Colorado.

FOOD SECURITY:
SUPPLEMENTAL NUTRITION ASSISTANCE PROGRAM (SNAP)

The Supplemental Nutrition Assistance Program or SNAP helps low-income Coloradans purchase food by providing individuals and families with a monthly cash benefit that can be used to buy certain foods. SNAP is an entitlement program that is funded by the federal and state governments and administered by counties in Colorado.

State Department: Department of Human Services

Eligibility: Currently, Coloradans qualify for SNAP if they have incomes below 200% FPL, are unemployed or work part-time or receive other forms of assistance such as TANF, among other eligibility criteria. Income eligibility for SNAP was different during the study period of this report than today—it was 130% FPL back in 2019 for example. The US Department of Agriculture uses the population at or below 125% FPL when calculating the Program Access Index (or PAI) for SNAP. We follow this practice in our analysis despite Colorado currently having a higher income eligibility threshold.

Program Benefits: SNAP participants receive a monthly SNAP benefit that is determined by the number of people in their household and their income. Benefit amounts decrease as income increases, helping households avoid a sudden loss of SNAP when their incomes increase, even by a minor amount. Benefits are provided to an Electronic Benefit Transfer (EBT) card that can be used to purchase eligible food items, such as fruits and vegetables; meat, poultry, and fish; dairy products; and breads and cereals. Other items, such as foods that are hot at their point of sale, are not allowable purchases under current SNAP rules.

Program Funding and Access: SNAP, like Medicaid, is a federal entitlement program. This means that Colorado must serve any Coloradan who is eligible for the program. As such, funding should not be a limit to how many Coloradans can be served by the program. However, funding for administration of SNAP at the state and county level can limit the ability of county human service departments to enroll those who are eligible. Other program rules and administrative barriers can make it difficult for Coloradans to receive the benefits they are legally entitled to receive.

Statewide Program Access 2015-19: Over the study period of this report, an average of 61.1% of the population at or below 125% of FPL (i.e., the population who is likely to be eligible for SNAP) were enrolled.

FOOD SECURITY:
SPECIAL SUPPLEMENTAL NUTRITION PROGRAM FOR WOMEN, INFANTS AND CHILDREN (WIC)

The Special Supplemental Nutrition Program for Women, Infants, and Children, also know as WIC, provides healthcare and nutritional support to low-income Coloradans who are pregnant, recently pregnant, breastfeeding, and to children under 5 who are nutritionally at risk based on a nutrition assessment.

State Department: Department of Public Health and Environment

Eligibility: To participate in WIC you must be pregnant, pregnant in the last six months, breastfeeding a baby under 1 year of age, or a child under the age of 5. Coloradans do not need to be U.S. citizens to be eligible for WIC. In terms of income, households cannot have incomes that exceed 185% FPL. Families who are enrolled in SNAP, TANF, Food Distribution Program on Indian Reservations (FDPIR), or Medicaid are automatically eligible for WIC. Regardless of gender, any parents, foster parents, or caregivers are able to apply for and use WIC services for eligible children.

Program Benefits: WIC provides a range of services to young children and their parents. These include funds to purchase healthy, fresh foods; breastfeeding support; personalized nutrition education and shopping tips; and referrals to health care and other services participants may be eligible for.

Program Funding and Access: WIC is funded by the US Department of Agriculture. The state uses these federal funds to contract with local providers, known as WIC Clinics. In most cases, these are county public health agencies, but that is not the case in all Colorado counties. Some WIC Clinics cover multiple counties, while others are served by multiple clinics. Private non-profit providers are also eligible to be selected as a WIC Clinic.

Statewide Program Access 2015-17: Between 2015 and 2017, an average of 52.2% of the population eligible for WIC were enrolled in the program in Colorado.

Financial Security:
Colorado Works

Colorado Works is the name given to Colorado’s program for Temporary Assistance to Needy Families or TANF. It is an employment program that supports families with dependent children on their path to self-sufficiency. Participants can receive cash assistance, schooling, workforce development and skills training depending on the services available in their county.

State Department: Department of Human Services

Eligibility: In general, Coloradans are eligible to enroll in TANF if they are a resident of Colorado, have one or more children under the age of 18 or pregnant, and have very low or no income. For example, to be eligible to receive a basic cash assistance grant through TANF, a single-parent of one child could not earn more than $331 per month, with some exclusions—and would only receive $440 per month (as of 2022). That said, there are other services provided by counties through TANF that those with incomes as high as $75,000 may be eligible for. In addition to these, participants in TANF are required to work or be pursuing an eligible “work activity” or work-related activity. Any eligible individual can only receive assistance if they have not previously been enrolled in TANF for a cumulative amount of time of more than 60 months—this is a lifetime limit that does not reset. Counties may have additional requirements and offer benefits that are not available in other counties in Colorado.

Program Benefits:  While the exact benefits that one is eligible for under TANF can vary, all qualified participants are eligible to receive a monthly cash payment, call basic cash assistance. Other than cash assistance, counties are have a lot of choice in how to use their TANF funding; generally a use of TANF funds is appropriate so long as it advances one or more of the four purposes of the program: (1) provide assistance to needy families so that children can be cared for in their own homes or in the homes of their relatives; (2) end the dependence of needy families on government benefits by promoting job preparation, work, and marriage; (3) prevent and reduce the incidence of out-of-wedlock pregnancies; and (4) encourage the formation and maintenance of two-parent families.

It is important to note that those eligible for TANF are also eligible for many of the other programs we’ve included in this report, such as SNAP, Medicaid, and CCCAP.

Program Funding and Access: Colorado funds its TANF program through funds received from the federal government through the Temporary Assistance for Needy Families block grant. Most of the federal funds are allocated by the state to counties, which are required to provide a 20% match of state funding. Federal and state rules allow the state and counties to retain a portion of unspent funds in a TANF reserve.

Statewide Program Access 2015-19: Over the study period of this report, an average of 50.7% of the population at or below 100% of FPL (i.e., the population who is likely to be eligible for TANF) were enrolled in TANF in Colorado.

EARLY LEARNING:
COLORADO CHILD CARE ASSISTANCE PROGRAM (CCCAP)

The Colorado Child Care Assistance Program provides child care assistance to low-income families and caregivers living in Colorado in the form of reduced payments for child care. It is a program funded by the federal, state, and county governments and is administered by counties in Colorado. The share owed by parents/caregivers is determined on a sliding scale based on the family’s income.

State Department: Department of Early Childhood Education

Eligibility: Counties set eligibility for families separately, but must serve families with incomes at or below 185% of the Federal Poverty Limit. Families accepted to the program are no longer eligible once their income exceeds 85% of the state median income. Parents or caregivers must be employed, searching for work, or engaged in another approved activity to be eligible for CCCAP. Parents and caregivers enrolled in Colorado Works (Temporary Assistance to Needy Families or TANF) or in the child welfare system are also eligible to participate in CCCAP. Generally, CCCAP serves families with children under 13, although children as old as 19 may be eligible under certain circumstances.

Program Benefits: If a family is eligible for CCCAP and has income, they may likely have to pay a portion of their child’s or children’s child care costs each month. The amount that families owe is based on their gross income, number of household members, and the number of children in child care in the household. As such, households tend not to experience a benefit cliff with CCCAP when they see their incomes increase

Program Funding and Access: Colorado funds the CCCAP program using federal dollars it receives from the Child Care and Development Block Grant program. The state allocates federal and state funds to counties using a formula that takes into account factors like current caseloads and the number of eligible residents. Assistance is available until the county’s funds are spent, so the number of families that can be served is often a function of how much funding is available and the income and composition of the household that applies. It is not uncommon for counties to overspend or underspend their allocations of funds. The state reallocates unspent funds from counties who underspent to those who overspent. While underspending could indicate a problem with the way a county administers its CCCAP program, it could just as likely be a sign that there are few providers in the county who participate in CCCAP—or a lack of providers generally.

Statewide Program Access 2015-19: Over the study period of this report, an average of 10.8% of the population at or below 165% of FPL and younger than age 13 (i.e., the population who is likely to be eligible for CCCAP) were enrolled in CCCAP.

Housing:
HUD rental assistance programs

The US Department of Housing and Urban Development (HUD) has three housing assistance programs that we look at together: Housing Choice Vouchers (Section 8), Project-based Section 8, and Public Housing. In Colorado, these programs provided assistance to over 90% of the households who received federal housing assistance from all HUD programs. Through federally funded, local or regional public housing agencies (PHAs) are the agencies that administer these programs, through not all are available in all counties. These are not the only programs available in Colorado that assist households afford the cost of housing, such as units funded through federal and state tax credit programs.

State Department: Department of Local Affairs

Eligibility: Generally, households with incomes under 50% of the area median income (AMI) of the county they live in are eligible for these rental assistance programs, although PHAs have discretion to select households with incomes at higher percentages of AMI. That said, HUD requires that 75% of new vouchers issued through the Housing Choice Voucher/Section 8 program in a given year are targeted to households with incomes at or below 30% of AMI. PHAs are also able to create criteria that give priority to certain types of households who are on waiting lists for these programs.

Program Benefits: These rental assistance programs help households afford the cost of housing by reducing their housing costs to around 30% of their household income. In the case of the Housing Choice Voucher program, the PHA pays the voucher holder’s landlord the remaining portion of the rent.

Program Funding and Access: Funding and access are both challenges for these rental assistance programs. In addition to limitations on the number of public housing units or housing vouchers a PHA can manage or issue, lack of funding compared to the need constrains the ability of PHAs to assist low-income households. In 2020, Coloradans were on waitlists for Housing Choice Vouchers for an average of 17 months. Waitlists also exist for the other rental assistance programs.

Statewide Program Access 2015-19: Over the study period of this report, an average of 21.1% of renter households with incomes at or below 50% AMI (i.e., the population who is likely to be eligible for HUD rental assistance programs) were living in subsidized housing.