The Cost of Living Crisis Isn't What You Think

Is the cost of living crisis actually real? Hear me out on this. According to the Survey of Household Economics and Decision-Making, and as reported by the Financial Times, when people are asked about the health of the US economy year by year, more people are rating it poor. The US economy apparently is getting worse and worse, but when people are asked about their own personal position, interestingly, there's almost the same percentage of people rating their own financial position as poor as there was before the pandemic.

Despite the unemployment rate rising during lockdowns and the rampant inflation we've seen, and now the bruising interest rate environment we're all living through, people don't seem to be all that worse off. But of course, that's not what you see in the media, right? I feel like every day we're seeing article after article talking about how bad economic conditions have become and how hard it is to get by at the moment.

Well, a guy by the name of John Burn-Murdock recently looked into this. Back in the late 1800s, American newspaper publisher and politician William Randolph Hearst coined the phrase "if it bleeds, it leads," explaining the tactic of the media to lead with negative news stories first, as they usually got the most attention from the viewer. What John Burn-Murdock has done in this article in the Financial Times is he's explored how well that old philosophy holds up today, and spoiler alert, it does hold up.

A recent study analyzing 1 million transcripts from 6 US broadcasters demonstrates a striking negativity bias when it comes to reporting gas prices. The research found that US broadcasters are more likely to report on gas prices when they are high than when they are low. They also found the price at which this negative coverage takes off has been falling, essentially making negative headlines more likely even for the same level of affordability.

Lastly, they also found the negative headlines come sooner and stronger on subscription-based cable news channels, where the incentives to keep the viewer glued to the screen are strongest than on network television. And that's not all; the article also notes how articles written about the economy these days are more downbeat, despite recessions becoming less common, and references an article by Nature that actually found the more negative the headline, the more likely people are to click on it.

Putting all these things together—the fact that the media loves to talk negative, plus the fact that when surveyed, Americans think the US economy is going down the drain when they're reportedly doing okay—well, that all leads me to a question, which is: Is the cost of living crisis actually real? The cost of living has skyrocketed. You're paying more for food, gas, and utility. Life seems unaffordable, and with all this focus on the cost of living pressures at the moment, one great way that you can save money and precious time is through today's video sponsor, Blinkist.

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In the comments of my videos, I see a lot of people talking about how things aren't actually that bad at the moment. Interest rates, despite being at 5.5%, aren't historically high, and inflation isn't even that bad—only 3% at the moment. But here's the thing about the cost of living crisis: the 12-month inflation rating measures the difference in the Consumer Price Index from this point here to this point here—305 points to 314 points, a 3% difference.

But the cost of living crisis is not a phenomenon that we've been talking about across the past 12 months; it's something that we've experienced across the last few years as a result of the pandemic. So if we, in fact, extend this consumer price chart back to the start of 2020, we can see a much different story. Generally, prices are about 22% higher than they were back in 2020. It now costs $122 to buy the same goods and services a family could buy with $100 before the pandemic.

If we extend this chart back further and further, you can see why people are calling this a cost of living crisis: it’s because the rate at which things are getting more expensive is faster than at any point since at least the 1950s. Groceries were up 25% since January 2020; same with electricity. Used car prices have climbed 35%, auto insurance 33%, and rents roughly 20%.

So if there's one thing we can most certainly agree on, it's that prices in the economy are a lot higher than they were before the pandemic. But then that leads me to the question: Well, is it actually impacting people? Are people under pressure from the rise in costs? This is where things get really interesting. In 2020 and 2021, the answer was a resounding no. Despite the pandemic and the lockdowns— as crazy as it sounds, the data shows that people weren't really struggling.

Have a look at this: this is the personal savings rate in the US. This means the percentage of people's disposable income that they save. Back in 2020 and 2021, people were able to save a lot of money, and that's because the citizens of the United States were gifted a lot of money. So while the news articles at the time were very negative, a lot of people were saving more money than ever before.

But what did this lead to? Well, it led to a lot of spending once things opened up, and as you can see, spending has bounced right back and has continued up ever since. Now, this fury of spending after lockdowns were lifted and Americans were all cashed up led to the massive rise of inflation that we looked at before. But that led to the Federal Reserve being forced to step in and raise interest rates to try and slow down the economy.

So interest rates were raised from 0 to 5.5% in quite a short space of time, and they still sit at the highest levels we've seen since the year 2000. This is where things started getting tougher for people because not only were prices of goods and services rising, suddenly mortgage rates were rising, car loans were rising, and any variable rate consumer debt was getting more expensive to service.

So if we put the average household income and expenses on a chart, this is what's been happening over the past few years. Housing costs are rising thanks to interest rates, and household bills are rising thanks to inflation. Transport costs are rising due to gas prices rising, and car payments are going up. Food costs are rising due to inflation, and as you can see, this leaves people with less and less disposable income after all is said and done.

Look at how this translates into the data. As you can see, the personal saving rate after 2021 started falling as inflation ripped and as interest rates were hiked. Americans were able to save less and less, and right now the average American is saving just 3.4% of their disposable income. When you zoom out on the chart, you can see this is comparable to the lowest savings rates we've seen since at least the 50s.

Now, this isn't a good trend to see, but what's interesting is that everything I've spoken about so far still isn't really consistent with the idea that most Americans aren't reporting a worsening in their own financial position. Yes, the cost of living is undoubtedly higher, but if it was a cost of living crisis, surely people would be reporting that they are financially worse off.

Luckily, there might be two factors that are stopping the cost of living pressures from becoming a full-blown consumer crisis. The first is wages, and the second is wealth. If we start by looking at employment, a really interesting thing we've seen over the past few years is that the unemployment rate has not meaningfully risen despite interest rate rises. Normally, when interest rates go up, the economy slows down, businesses feel the pinch, and they lay off lots of workers. However, so far that simply hasn't happened.

We've certainly seen corporations use the guise of poor macroeconomic conditions to cut some of the workforce, but broadly, people have jobs. What's also interesting is that wages have risen quite a bit as well. When I say 'quite a bit,' I actually mean some of the fastest wage increases in decades. While this is largely slowed down now, as you can see by this Bloomberg chart from late last year, despite inflation rising so steeply, wages have risen by the same amount—around 20% since 2020.

While it sucks that this effectively means you're not really getting a pay rise, one benefit is that from a profit and loss perspective, people aren't going backwards. For most people, while the cost of living has risen, they are actually able to pay for that rise just from the growth in their wages. That is a very real reason why so far the cost of living rises have not translated into Americans reporting a worsening in their financial position.

But there is one more factor that plays a role in that consensus, and that is wealth, aka asset values. Even though we saw some big swings in the stock market in 2020, since riding out those initial bumps, both stocks and real estate have performed really well. As I record this, since the start of 2020, the S&P 500 has risen 68% and outside of early 2020 hasn't given people any reason to panic. Turning to property, in most areas, the real estate market has held up very well, with the US median house price rising from $329,000 in Q1 of 2020 to $412,000 in Q2 of 2024. That's a 25% rise in 4 years.

At the end of the day, the net worth of asset-owning Americans has only gone up since the onset of the pandemic. When you couple this with wages and inflation rising in lock step, maybe the cost of living crisis is just good marketing from the media to get us to click on more articles. But with that said, before I sign off, I do just want to acknowledge that throughout this video, I've been working with numbers that represent averages or medians.

While that's useful for population data and broader trends, of course, this doesn't reflect everyone's situation. In these scenarios, people below the average usually get disproportionately affected compared to those above it. So while broadly the cost of living crisis phrasing might be a little bit extreme for what most people are going through, I just want to make clear that it certainly doesn't reflect everybody's circumstances.

I just want to acknowledge that there are definitely still people doing it tough out there. But overall, with that said, I'd like to hear from you guys in the comments. So once you've, of course, liked the video, definitely let me know your answer. Compared to before the pandemic, do you feel as though you're in a better financial position, about the same, or are you feeling worse off?

I actually asked this to my Instagram audience last week, and interestingly, the results I got were remarkably consistent with the stats at the start of the video. 82% of respondents said they were better off, whereas 12% said they were roughly the same, and just 7% said they were worse off. I know that adds up to 101%, but Instagram likes to round things.

But anyway, please let me know your thoughts in the comments section below. If you're interested in learning how to invest in shares and you want a really comprehensive guide on either buying ETFs and passive investing or trying your hand at individual stock selection the Warren Buffett value investing way, please check out the courses over on New Money Education. They are really awesome courses; we've got lots of great testimonials.

We really poured our heart and soul into the creation of those courses; it took us nine months to create. So if you wanted to have a really good resource for learning to invest and if you wanted to support the channel in the process, definitely please check them out. But with that said, guys, thanks very much for watching. Please leave a like if you enjoyed, and I'll see you guys in the next one.

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