A newly released working paper by former Obama government Treasury Secretary Larry Summers asserts that the Consumer Price Index (CPI) may underestimate Americans’ financial pains from rising interest rates. “The economy is booming and everyone knows it — except for the American people,” Summers states.
The elevated interest rates enacted by the Federal Reserve have increased expenses such as buying a house or carrying credit card balances. Summers’ paper, titled “The Cost of Money is Part of the Cost of Living,” explores the disconnect between what he claims are positive economic indicators and the public’s persisting ‘sour mood‘ on the Biden economy.
Summers notes that until 1983, the government’s CPI measurement incorporated housing prices via mortgage expenses and would rise as those rates increased. However, the current CPI calculation measures housing costs based on rent prices, a change Summers argues might only partially capture the financial strain on Americans.
While lauding the efficacy of the current CPI measurement, Summers emphasizes that understanding people’s economic well-being necessitates incorporating interest rates into the calculation. Should the pre-1983 formula be used today, Summers contends that 2022 inflation would be around 15 percent instead of 9.1 percent, thus painting a starker picture of the economic reality for many households.
Allies of President Biden, like Summers, are pressuring Federal Reserve chairman Jerome Powell to slash interest rates. They hope reduced rates will stimulate the economy and Biden’s re-election chances. However, Powell and several members of the central bank’s board of governors have signaled they are hesitant to reduce rates before the 2024 election.