Latest / Inflation Explained with Fexingo: CPI, Prices, and the Cost of Living for Everyday People / Child Care Costs Are the Inflation the CPI Misses
Transcript
- Lucas: So the CPI for May came in at 334.0 — up about half a percent from the previous month. Core CPI, which strips out food and energy, also ticked higher. The Fed’s preferred inflation gauge, the PCE price index, is at 130.9. All these numbers get pored over by economists and traders, and they tell a story about how fast prices are rising across the economy. Luna: But they don’t tell the whole story. Right? I mean, there’s a big chunk of household spending that basically falls through the cracks of the official inflation statistics. Lucas: Exactly. And one of the biggest holes is child care. Think about how the Bureau of Labor Statistics collects price data: its surveyors go to stores, they check online prices, they call service providers. But a huge share of child care in this country happens informally — a neighbor watches the kids, a grandparent gets paid under the table, a nanny is paid in cash with no receipt. Luna: And that cash payment never shows up in the CPI. So the official inflation rate might say 3 percent, but if you’re a family paying $2,400 a month for a nanny and the nanny just raised her rate to $2,600, your personal inflation rate is over 8 percent. Lucas: Right. The BLS does try to capture formal child care centers — the ones with a business license, a storefront, a reported price. But those are often more expensive and used by a smaller slice of families. The informal market — the one that low- and middle-income families rely on — is essentially invisible to the statisticians. Luna: So what’s the scale of this blind spot? Do we have any idea how much money is moving around off the books in child care? Lucas: We have estimates. The IRS, through studies of the earned income tax credit and the child and dependent care credit, figures that somewhere between 30 and 40 percent of child care payments are never reported. That’s hundreds of billions of dollars a year. And if that spending is rising faster than the formal sector — which it likely is, because formal care centers have been raising prices too — then the CPI is systematically understating the cost pressure on families. Luna: And this connects to something else we talk about a lot on this show: the 10-year breakeven inflation rate, which is currently at 2.25 percent. That’s the bond market’s expectation for average inflation over the next decade. But if the CPI itself is missing a big source of price increases, then that 2.25 percent might be too low. Lucas: That’s the deeper point. The breakeven rate is derived from the difference between nominal Treasury yields and Treasury Inflation-Protected Securities. It’s only as good as the inflation index it’s based on. If the CPI has a structural blind spot, then every market instrument that references CPI — TIPS, inflation swaps, even some corporate bonds — is inheriting that blind spot. Luna: Let’s make this concrete. Give me a typical family in, say, suburban Atlanta. Two working parents, two kids under five. What are they actually paying? Lucas: I pulled some numbers from a recent Care.com survey. For a full-time nanny in Atlanta, the median rate is around $18 an hour. Forty hours a week, that’s $2,880 a month. A formal daycare center might be $1,500 per child per month, so $3,000 total. But many families can’t get into those centers — waitlists are long — or they prefer a nanny because of flexibility. So they go informal. They pay $2,400 cash, no taxes, no receipt. Luna: And the BLS, when it surveys for child care prices, is probably calling those formal centers and recording the $1,500 per child. So the official price index for child care might show a 4 percent increase year over year. But the cash market could have gone up 8 or 10 percent. Lucas: Exactly. And this isn’t just a measurement quirk. It has real policy implications. The Federal Reserve looks at inflation data to set interest rates. If the data says inflation is 3 percent but families are experiencing 5 percent, then monetary policy might be too loose for the people who are actually struggling. The FOMC raised rates aggressively in 2023 and 2024, and they’ve held them around 3.63 percent lately. But if they’re looking at an understated CPI, they might think they’ve done enough when they haven’t. Luna: And there’s a distributional angle too. Wealthier families are more likely to use formal care centers that show up in the CPI. Lower-income families are more likely to use informal arrangements. So the inflation that the CPI measures might track the experience of higher-income households better than the experience of lower-income ones. Lucas: Right. The CPI basket weights are based on spending patterns from the Consumer Expenditure Survey, which does try to capture all households. But the price collection misses the informal sector. So even if the weights are right, the prices are wrong. Luna: Has the BLS ever tried to fix this? I know they’ve done some experimental work on measuring the gig economy and informal services. Lucas: They have. There’s a research paper from a few years ago that used data from a platform like Care.com to construct an alternative price index for child care. They found that the platform-based index rose faster than the official CPI for child care — about 1.5 percentage points more per year over the study period. But the BLS hasn’t adopted it as a official series. There are methodological challenges: platform data isn’t representative of all informal care, and there are privacy concerns. Luna: So we’re stuck with a CPI that, for millions of families, understates their cost of living. And the Fed sets policy based on that number. Lucas: And the bond market prices trillions of dollars in TIPS based on that number. Look, I’m not saying the CPI is useless. For goods and services that are bought and sold in formal markets — groceries, gasoline, electronics — it’s quite good. But for something like child care, where a huge share of transactions happen in cash, it’s systematically missing the trend. Luna: And you could argue the same for other services — house cleaning, home repair, elder care. There’s a whole shadow economy of services that keep households running but never get recorded. Lucas: Exactly. And that’s the kind of thing that makes you wonder: if the official inflation numbers are off by even half a percentage point for a big chunk of the population, what does that mean for how we think about the economy? Are we really as close to the 2 percent target as the data suggests? Luna: You know, if this episode made something click for you — maybe about how official statistics work or how your own family budget compares — and you found that worth the cost of a coffee, we have a link where that coffee can come back to us. It’s buy me a coffee dot com slash fexingo. No pressure, but it helps us keep the show ad-free and dig into exactly these kinds of blind spots. Lucas: Yeah, it’s a low-key way to say this episode mattered to you. And we really appreciate it. Now, back to that blind spot: I think the bigger question is whether the Fed should adjust its framework to account for these measurement issues. Some economists argue for a 'dual inflation' concept — one rate for formal markets, one for informal. But that would be a huge shift. Luna: And politically fraught. Because if you admit that inflation is higher for certain groups, then you’re admitting that policy has been too tight or too loose for them specifically. Lucas: Right. The Fed’s mandate is maximum employment and price stability for the whole economy. But if the price stability part is measured with a biased yardstick, then you’re making decisions based on bad information. Kevin Warsh, the new Fed chair, held his first meeting just last week. I wonder if this is something he’s thinking about. Luna: Maybe we’ll see a research initiative. But in the meantime, families are just living with the reality of prices that feel higher than the official numbers suggest. Lucas: And that’s the real story. The CPI says inflation is cooling. But if you’re paying a nanny cash, your personal CPI might still be running hot. And that gap — between the official numbers and lived experience — is the thing we should be paying attention to.