Inflation isn't just a number on a government spreadsheet. It’s the visceral sting you feel when a carton of eggs costs five dollars or when your rent jumps by twenty percent without warning. While the Bureau of Labor Statistics (BLS) puts out the Consumer Price Index (CPI) every month, many people feel like those figures are, frankly, a bit of a fantasy. That’s exactly why this economist crunched the numbers to figure out why your bank account feels so much lighter than the official data suggests.
Economist and former hedge fund manager Stephen Miran, along with several researchers at Harvard and the IMF, recently took a massive swing at redefining how we look at the "cost of money." They didn't just look at the price of milk. They looked at the price of borrowing.
It turns out that when you include the skyrocketing cost of interest—things like personal loans, car payments, and the massive weight of a 7% mortgage—the "true" inflation rate looks a lot uglier than the 3% or 4% we see on the news. In fact, if you used the pre-1983 formula for CPI, which actually included the cost of financing a home, inflation would have peaked much higher during this recent cycle.
Why the Official Numbers Feel Like a Lie
Let’s be real. If the government tells you inflation is "cooling" but your car insurance just went up by $400 a year, you’re going to roll your eyes. The disconnect happens because the CPI is a "cost-of-goods" index, not a "cost-of-living" index.
Back in the early 80s, the BLS changed how they calculate housing costs. They moved away from actual mortgage interest and toward something called "Owners' Equivalent Rent" (OER). Basically, they ask homeowners: "How much do you think you could rent your house for?" It’s a survey. It’s subjective. And it completely ignores the reality of someone trying to buy a home today.
When this economist crunched the numbers, specifically looking at the impact of interest rates on the American consumer, the findings were startling. High interest rates are meant to fight inflation, but for the average person, those rates are inflation. They are a direct increase in the cost of existing. If your credit card interest rate jumps from 15% to 24%, your life just got more expensive, even if the price of a gallon of gas stayed the same.
The Problem with Owners' Equivalent Rent
The OER is a weird metric. It was designed to separate the "investment" part of owning a home from the "consumption" part. But you can't live in an investment. You live in a house. When interest rates spiked, the cost of a monthly mortgage payment for a median-priced home basically doubled in a few years. Yet, because the CPI uses OER, that massive surge in the cost of shelter was muted in the official reports.
This creates a massive gap in perception. Policy makers look at a dashboard that says things are stabilizing. You look at a mortgage calculator and realize you’re priced out of your own neighborhood.
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The Interest Rate Trap
There is a specific irony here. The Federal Reserve raises rates to kill demand. They want you to stop spending so prices stop rising. But for the millions of Americans who carry debt, those rate hikes function as a massive, invisible tax.
Mariana Mazzucato and other prominent economists have often pointed out that our economic metrics are only as good as what we choose to value. If we don't value the "burden of debt" as a cost, we aren't seeing the whole picture. This economist crunched the numbers and found that if you factor in the cost of borrowing, the "misery index" is significantly higher than what was reported during the post-pandemic recovery.
Consider the auto market. For years, you could get a 0% or 1.9% APR on a new truck. Now? You're lucky to see 6% or 7% unless you have a credit score that borders on perfection. On a $40,000 loan, that interest difference adds thousands to the total cost over the life of the loan. The CPI might show the "price" of the truck only rose 3%, but your actual out-of-pocket cost rose by 15% or 20%.
Small Business Suffocation
It isn't just households. Small business owners are getting hammered. Most small businesses rely on lines of credit to manage cash flow. When the prime rate moves, their costs move.
- Inventory financing: Costs more.
- Equipment leases: Costs more.
- Expansion loans: Nearly impossible.
When these costs go up, the business owner has two choices: eat the cost and potentially go under, or pass it on to you. This is the "cost-push" inflation that often gets ignored when we only focus on consumer demand.
What the Data Actually Tells Us About the Future
When you look deep into the spreadsheets, you start to see some "sticky" trends. Services inflation—things like haircuts, medical care, and car repairs—is much harder to bring down than the price of physical goods like TVs or clothes.
This is because services are tied to wages. If a mechanic needs more money to pay his own inflated mortgage, he has to charge more for an oil change. It’s a cycle.
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This economist crunched the numbers on the "wage-price spiral" and found that while wages have grown, they haven't actually kept pace with the total cost of living when interest is included. We are working more to buy less, even if the "inflation-adjusted" charts say we are breaking even. It’s a treadmill that’s moving just a little bit faster than we can run.
The Wealth Gap Widens
Another uncomfortable truth revealed by the data is who wins and who loses in this environment.
- Winners: People who locked in 2.5% mortgages in 2021 and have large cash savings earning 5% in money market accounts.
- Losers: Renters trying to buy their first home, anyone with revolving credit card debt, and people looking to trade in an old vehicle.
The economy has essentially split in two. There is a "protected class" of asset owners and a "vulnerable class" of people trying to enter the market. The official data averages these two groups together, which results in a number that doesn't really describe the reality for either.
How to Protect Your Own Finances
Since the official numbers might not be giving you the full story, you have to be your own economist. You can't control the Federal Reserve, but you can control your exposure to the "interest inflation" that this economist crunched the numbers on.
First, look at your "personal inflation rate." This is a simple exercise. Take your total spending from twelve months ago and compare it to today. Don't just look at the price of milk. Look at your insurance premiums, your subscription services, and your interest payments. Most people find their personal rate is 2% to 3% higher than the national CPI.
Second, prioritize debt destruction. In a high-interest environment, a 20% interest rate on a credit card is a financial emergency. It is a guaranteed "negative return" on your money. No investment in the stock market is going to reliably beat a 20% return, so paying off that debt is the best investment you can make.
Third, rethink big purchases. The "cost of money" means that the true price of a house or car is much higher than the sticker price. If you can wait for a rate cycle to turn, or if you can buy used with cash, you are opting out of the most expensive part of the current economy.
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Strategic Adjustments
- Audit your "leaking" cash: Small subscriptions that have increased by $2 or $3 might seem minor, but they add up to a significant percentage of your discretionary income.
- Negotiate everything: From internet bills to insurance, companies often have "retention" rates they don't advertise.
- High-yield savings: If you have any cash, make sure it’s earning at least 4.5% or 5%. If it's sitting in a traditional big-bank savings account earning 0.01%, you are literally giving money away to the bank.
The reality is that "crunching the numbers" isn't just for people with PhDs. It’s a survival skill. The world is getting more expensive in ways that aren't always captured in a neat little line graph on the evening news. By understanding the gap between official data and your lived experience, you can make better choices about where your money goes.
Stop waiting for the "official" inflation rate to hit 2%. It might never feel like that in your actual life. Instead, focus on the variables you can tweak—your debt, your high-interest savings, and your consumption habits. That’s the only way to beat the numbers that the economists are so busy calculating.
Actionable Steps for Today
Start by calculating your Debt-to-Income (DTI) ratio. If more than 35% of your pre-tax income is going toward debt payments, you are in the "danger zone" for interest-rate-driven inflation.
Next, check your credit card statements for "interest charges." Most people ignore that line item and just look at the balance. Seeing exactly how many dollars you are lighting on fire every month is the motivation you need to change your spending.
Finally, if you’re a homeowner, don't just look at your home’s value. Look at your "equity position." If you have significant equity, a Home Equity Line of Credit (HELOC) might be a cheaper way to consolidate high-interest credit card debt, but be careful—you're putting your roof on the line.
The data is clear: the cost of money is the new inflation. Treat it with the respect it deserves.