Are Americans as Poor as They Feel?

For many Americans, thinking back to the days of 99¢ gas and 50¢ cups of coffee, it may be cathartic to grumble about how expensive life has become, especially during the current economic downturn. The reality, however, is that a lot of things aren't as expensive as we think—and many things actually cost less in relative terms.

A look at the cost of living between 1980 and 2010 shows that nominal income rose more than overall consumer prices (nominal income is income not adjusted for inflation). The price of many day-to-day expenses such as food and even energy increased at a slower pace than overall consumer prices, which means their relative costs are lower, while some big-ticket items, such as education and health care, became more expensive, causing a shift in spending.

In 2009 the average household spent $49,067 on such expenses as housing, transportation, food, and entertainment—less than in 2008 but up by $3,692 (in 2009 dollars) since 1984—according to data from the U.S. Bureau of Labor Statistics Consumer Expenditure Survey.

To analyze how costs have changed, compared the average price of some basic consumer expenditures today with the same expenses back in 1980, the year the U.S. Bureau of Labor Statistics began its ongoing consumer spending survey. Price data came from reports by the BLS and the nonprofit research group Council for Community and Economic Research, as well as other sources.

One New Cost: The Web

The results show that the relative price of such necessities as groceries and fuel decreased over the past 30 years, while the price of big-ticket items, such as health care and education, more than doubled. Also, many households added expenses for media and technology, such as computers and Internet and cell phone service, which add up to more than $1,000 per person per year, on average, reported The New York Times.

One factor driving the shift in costs: productivity. Barry Bosworth, senior fellow of economic studies at the Brookings Institution, says relative prices are down for such items as electronics, which have had rapid productivity gains over the decades.

Education has been one of the biggest contributors to spending increases. Since 1980 the average cost of college tuition and room and board more than doubled in real dollars (jumping nearly 500 percent in nominal dollars), to $20,435 in 2008 per year, according to the National Center for Education Statistics. The rise can be attributed to several factors, including declining state funding for public universities over the last decade, institutions' failure to educate more students with fewer resources, and spending on new technology and such services as student counseling, says Sandy Baum, an independent policy analyst for the College Board and professor of economics at Skidmore College.

Premium for College Education

The increase may seem steep, but Bosworth says the returns on college education have also increased: In 1980 the average college graduate earned 30 percent more than a high school graduate, and prior to the recession, the premium had expanded to more than 60 percent, according to a paper by the National Bureau of Economic Research.

The emphasis on education also indirectly affected the cost of living, argue Harvard Law School professor Elizabeth Warren and writer Amelia Warren Tyagi in The Two-Income Trap (Basic Books, 2003). As good school districts attracted demand for homes in a community, home buyers engaged in bidding wars that drove up home prices. Many bought homes they could not afford.

In real dollars, the median existing home price in 2006 was up about 40 percent from 1980 levels, according to data from the National Association of Realtors. The gap has narrowed as values have dropped nearly one-fourth from peak levels. Spending on homes, rentals, and vacation properties increased to 20.5 percent of total expenditures in 2009, from 15.9 percent in 1984, BLS data shows.

"When home values were rising rapidly, it was possible to borrow some of the equity to support consumption," says Bosworth. "The result was an increase in consumption that outpaced the growth in incomes."

Medical Cost Nightmare

Another cost that has increased significantly: health care. Health insurance more than doubled to 3.6 percent of the average annual spending (slightly more than they spent on electricity) between 1984 and 2009, according to the BLS. The average annual premium for single coverage this year is $5,049, according to data from the Kaiser Family Foundation. Some factors driving up premiums: rising costs for physician and clinical services, hospital inpatient spending, and hospital outpatient spending, as well as increased use of services, according to a 2008 report by PricewaterhouseCoopers.

Of course, whether life has become more or less expensive relative to income depends how much one consumes. "Household income, even adjusted for inflation, has increased, which would suggest that well-being has improved," says Scott Hoyt, senior director of consumer economics at Moody's Analytics.

The consumer price index—which includes food and beverage, housing, apparel, transportation, medical care, recreation, education, communication, and other goods and services—grew nearly 160.4 percent, to 214.537, from 1980 to 2009, according to BLS data. In the same period, median household income in nominal dollars increased 181 percent, to $49,777, U.S. Census Bureau data show, or 8 percent in real dollars. BLS data indicate that while high-income earners saw the biggest increase in that period, average income rose for middle-income earners too.

Increasing Financial Obligations

Warren and Tyagi write that compared with the 1970s, more families now have two full-time incomes, but the change in lifestyle led to new needs, such as a second car and day care. After an average two-income family makes its house payments, car payments, insurance payments, and child care payments, it can have less money left over, even though there is a second full-time earner in the workplace, they say.

Financial obligations (mortgage, rent, consumer debt payments, automobile lease payments, and property tax payments) rose to 17.02 percent of disposable personal income in 2010's second quarter, from 15.45 percent in 1980, reaching a high of 18.86 in 2007, according to Federal Reserve data. Financial obligations represent a larger portion of income in many households, but the ratio is affected by high-income earners.

"From the mid-1980s through the middle of this past decade, consumers loaded up on loans. Household debt rose far more rapidly than household income," Hoyt states in a Moody's Analytics report. "Credit-card use expanded rapidly, and technological innovations gave more consumers access to credit, including subprime borrowers."

More Cars, More Computers

Car ownership jumped 14.3 percent, to 1.91 vehicles per household, from 1983 to 2009, according to a report by the U.S.Energy Dept.. Also, new technologies such as computer hardware and software, Internet service, and cell phone service rose from near zero to 2 percent of total spending, according to the BLS.

Food as a proportion of total expenditures decreased to 13 percent in 2009, from 15 percent in 1984, the BLS says. The CPI for food grew less than overall prices. From 1980 to 2010, the average price in real dollars for one pound of coffee dropped 55.9 percent, to $3.70, BLS data show. The price for one pound of ground beef dropped 31.7 percent (inflation adjusted), to $2.72, according to Council for Community and Economic Research.

In 2010, the price of agricultural commodities has been rising, but retail prices for food do not increase in tandem with commodity prices. A 10 percent change in the commodity price for coffee, for example, is likely to result in a 3 percent change in the retail price, according to a report by the U.S. Agriculture Dept.

Other categories with spending decreases include energy—although prices are volatile. BLS data show that in inflation-adjusted dollars, 2009 real spending on natural gas was 21.2 percent below 1984 levels and spending on gasoline fell 9 percent. Also, apparel and services such as dry cleaning fell to 4 percent of total annual expenditures, from 6 percent in 1984, according to the BLS.

In the downturn, expenditures have been cut and savings have increased, yet Bosworth notes that the U.S. "is still an extraordinarily rich society where Americans maintain outsize consumption 'needs' relative to other societies." Even as prices fluctuate, how much one spends can depend less on what individuals need than on what they want.

Click here to see how the relative costs of 35 of America's most basic expenditures have risen—or fallen—over the past 30 years.