NerdWallet's Smart Money Podcast - The "New" Meaning of Inflation and How It's Impacting Your Finances

Episode Date: June 19, 2024

Understand the evolving definition of inflation, potential changes to medical debt reporting and their impact on your finances. Why does the consumer’s perception of inflation differ from the economist’s perspective? How does this shift in understanding impact our economy? Hosts Sean Pyles and Anna Helhoski talk about the gap between how regular people and economists talk about inflation and what this means for consumers. Chief Financial Correspondent at Axios and host of the Slate Money podcast, Felix Salmon, joins the show to discuss as well. Then, they explore the proposed Consumer Financial Protection Agency rule to keep medical debt off credit reports to help you understand how this could impact your credit score and financial well-being. You’ll walk away with a better understanding of the evolving definition of inflation, the potential changes to medical debt reporting, and how these shifts could influence your financial decisions. In their conversation, the Nerds discuss: inflation, medical debt, credit report, cfpb rule, consumer price index, economic impact, wage growth, financial news, inflation rate, credit score, debt reporting, financial advice, consumer perception, financial literacy, personal finance, economic trends, credit reporting agencies, election impact, financial podcast, smart money, debt management, economic discourse, financial wellbeing, inflation growth, finance tips, debt relief, money management, credit agencies, wage inflation, credit rules, debt collection, financial insights, money news, medical bills, credit impact, financial planning, debt impact To send the Nerds your money questions, call or text the Nerd hotline at 901-730-6373 or email [e-mail]. Like what you hear? Please leave us a review and tell a friend.

Welcome to NerdWallet's Smart Money Podcast. I'm Sean Piles. And I'm Anna Helhosky. And this is our weekly money news roundup, where we break down the latest in the world of finance to help you be smarter with your money. We'll go deep into a single topic and then leave you with the latest money headlines. Today, we're turning once again back to inflation. Listeners, for context, one of the key measures of inflation, the Consumer Price Index, was released last week with data from May. Yeah, Sean, the CPI showed that inflation came in lower than economists expected. Inflation growth was flat from the previous month for the first time since July 2022,

and annual inflation slowed from 3.4% in April to 3.3% in May. A report like that should be a welcome sign for consumers, but it might not be as confidence-boosting as you might expect. Following the CPI's release, Ana spoke with Felix Salmon, chief financial correspondent at Axios and host of the Slate Money podcast, about the gap between how regular people talk about inflation and what economists have to say about it. I would say it's a Grand Canyon-sized chasm right now, Sean. Felix Salmon, welcome to Smart Money. Hi, Anna. It's great to be here. So you wrote a piece for Axios recently explaining how the meaning of inflation has changed and how that change is impacting the discourse about the economy. So first off, what's shifted and who's influencing it? The big shift is that what

used to be a sort of econ nerd term, you know, which is inflation is the amount that consumer prices have risen or fallen in the past 12 months has become this political football. And the meaning of the word has, if you actually look at how it's used in the discourse, in the vernacular, on a day to day basis, that definition of inflation is not the actual thing that people are talking about. The actual thing that people are talking about is high prices. So if you're a math nerd, you will understand this, you'll be like, there's the price level, and then there's the first derivative of the price level. And inflation is supposed to be the first derivative of the price level, but most Americans aren't math nerds, and they have no idea what a first

derivative is, so they just think that inflation is high prices. Now, how quickly has the vernacular evolved? Was this conception of inflation already established among the broader public before the pandemic, and experts just weren't paying attention? Or did it really only take hold after the rate of inflation peaked? It really only took hold after 2022 when inflation started getting high. Before then, no one was paying attention. Inflation was so low for so long that people didn't really pay attention to it. They didn't really care about it. It wasn't a central issue, either politically or socially. But then it became an issue in 2022. The Fed

started coming out and saying it was transitory, which it turns out it kind of was it came back down again. But that was, you know, econ speak inflation came back down again. What didn't come back down was prices. And there was this fantastic Morning Consult opinion poll that just came out where they said 87% of Americans are worried about inflation, but 86% of Americans are worried that prices are not back down to their pre-pandemic levels. In order to get that, we would need deflation. We would need massive, painful deflation. It would be an economic disaster. But Americans don't really understand that. And they just kind of think,

well, life was better when prices were lower, and therefore prices should be lower. Can you give a quick explanation of deflation and why it would be quite so bad economically? So deflation is when prices go down rather than up. And if you have an economy where prices are going down, you have no incentive to spend money because if you just wait for a month or six months or a year, that price is going to be cheaper in the future than it is today. So basically what happens is that everybody stops spending money. And that is a great definition of a recession. So you can kind of see why people gravitate toward the intuitive interpretation of inflation. The consumer's reality is the price of eggs on the shelf or how much they need to pay for gas,

not the rate at which those prices have changed since the last time a government agency measured them. Right. And the other weird twist here is that there's this convention that we use one year as the period over which we measure inflation. But that's not a particularly salient period. No one can easily remember exactly where they were a year ago or how much they were paying a year ago. in most Americans' minds, it's like pre-pandemic or maybe under President Trump or something like that. And again, if you look at this morning consult poll, the number of Americans who think of inflation as being measured over four years is significantly larger than the number of Americans who think of it as being measured over one year. Right. And the sticker prices for things that they're buying today are a lot higher than they were four years ago. But I keep thinking about this. What they're not necessarily talking about is how affordable those products are.

I mean, wages today are also higher than they were four years ago. Wage growth has even outpaced inflation. Why is that not a salient to people? I guess it's because when you go out shopping, you're not mentally dividing by the size of your paycheck. You're just paying in dollars. And if people have, you know, got promotions or pay rises or something like that, they think that that should be extra money, that should be more money for them. They don't think of that as like, well, this is something I just need to keep up with inflation. And yeah, that this always happens pretty much is that any increase in pay is considered to be just a result of personal awesomeness rather than a general increase in the wage level,

even though on a macroeconomic level, yeah, it's just a general increase in the wage level. And as you say, the increase in the wage level really has kept up with inflation over the past four years or so. So we know that words and language are invented and transformed over time. That's pretty much a given. But when it comes to something like inflation, the word has a very specific economic meaning. It still is there. So to that end, it seems like if this intuitive concept of inflation supersedes the literal

meaning of inflation, it creates kind of a paradox. And as you point out in your article, it ends up meaning that inflation and that collective understanding of the word can be considered high, even if the actual rate of prices is slowing down or even falling. So we get this like paradox, right? And inflation has two different meanings, or possibly even three different meanings. One of the other things that Morning Consult found was that fewer than 50% of Americans think that inflation means a rise in prices. But it's not like the other 50% have

unanimity on what they think it means. It turns out that about 20% of people just think it means high prices, you know, the price level. And then there's about a third of Americans who think it means prices rising faster than wages. People don't think about this very much, to be honest. You know, people don't think much about the definition of words. You and I do because we're nerds. But normal Americans, they just kind of use the word inflation to mean, you know, something hand-wavy.

It's a vibe, you know, really what it is, it's a vibe. And the vibe is prices are high. So if we establish that the adoption of this intuitive meaning of inflation has changed the discourse around the economy in a very real way, has it produced any real life economic consequences? The weird answer to that question is no, right? I would have expected it to. If people are worried about inflation, then one of the things they do is they slow down their spending and they tighten their purse strings. And they're like, I can't afford to go on an expensive holiday or buy a new car because I don't have enough money. And so consumer spending goes down. In reality, we've seen consumer spending hold up very strongly. And in fact, people are paying down their excess savings

in a sign of great optimism about their future income and their ability to pay for stuff. And in fact, again, if you ask Americans how their personal finances are doing, they generally say they're doing quite well. There's a bunch of like paradoxical stuff here. Individually, we really don't see the kind of behavior in spending that you would expect if inflation was a real problem. And yet people are all convinced that inflation is a real problem. So as we all know, we have a presidential election coming up. If people are thinking of inflation in this colloquial, intuitive, kind of offhanded sense,

how might that impact what happens in the voting booth? So we have an economy where 86% of the country or 87% of the country is worried about inflation, whatever the meaning of that is. And this consistently ranks in the top two or three most important things that people care about. And the inflation has undoubtedly turned up under Biden's watch. It is lower empirically than in most other countries in the world, like everyone is suffering from inflation right now. And the US is doing better than most of Europe. But no one is comparing us to Sweden. You know, everyone is just better than most of Europe. But no one is comparing us to Sweden. You know, everyone is just saying we have high inflation. It happened under Biden.

This is a black mark for President Biden. And that at the margin is going to make people less likely to vote for him. All right, Felix, where do we go from here? We've seen the many think pieces about how people don't want to be told over and over that it's a good economy and inflation is coming down when they're the ones who are still spending more money at the grocery store than they did four years ago. If we accept that the meaning of inflation has changed for people, what do you say to the typical American consumer about why the traditional literal meaning of inflation still matters in the economy? You see, I think at that point, you just need to get into sort of

economics nerdery and they start tuning out. I think the vast majority of Americans just don't have enough interest in economics to be able to walk them patiently through the whole idea of like, you know, why zero to 2% positive inflation is actually a good thing. And we want to measure things on a year-on-year basis. And let me tell you about interest rates. You know, at that point, they've zoned out. You know, they know how much their eggs are. Felix Simon, thank you so much for joining the podcast today. It's been a pleasure.

Up next, a few money headlines from the last few days. Anna, there's some potential good news for folks who find themselves facing enormous medical bills that they have trouble paying. Yeah, the Consumer Financial Protection Bureau, the CFPB, has proposed a rule that would leave medical debt off credit reports. This would be a sea change for the credit reporting agencies and could in turn affect credit scores for Americans across the country. The proposal would keep those agencies from sharing any medical debt information with lenders, and lenders could not use medical information in their decisions about whether to extend credit to someone, whether that's a credit card or a bank

loan or a mortgage. In a press release, the CFPB's director, Rohit Chopra, said that, quote, medical bills on credit reports too often are inaccurate and have little to no predictive value when it comes to repaying other loans. The agency says more than 15 million people had medical collections on their credit reports as of June of last year. Now, this is just in the proposal stage right now. The CFPB is accepting comments until August 12th, and the rule could be finalized by early next year. If it goes through, it would apply retroactively as well. But the future of this and many other rules and changes the agency has implemented will also hinge on the results of the election in November. So vote. Vote.

Ana, have you ever found yourself banging your head against a wall trying to cancel an online subscription? All the time, Sean. They just don't make it easy, do they? They do not. And this week, the Federal Trade Commission and Department of Justice filed suit against Adobe for exactly that. Adobe is the software company that makes a suite of creative tools, including Photoshop,

Lightroom, Audition, Illustrator, InDesign, and more. And in order to use those tools, you sign up for an annual subscription. This lawsuit alleges that Adobe deceives consumers by hiding a fee it charges for early termination of its most popular subscription plan. That fee is 50% of the remaining monthly payments. So you can cancel,

but you'll still pay half of what you owe on the subscription. It also says that Adobe makes it difficult for people to cancel by delaying and resisting when consumers call to end their subscription. It says consumers are, quote, ambushed by the fee in an effort to deter the cancellation. So this is another effort by regulators to crack down on both fees and burying important information in the fine print. Masu alleges all of this is a violation of the Restore Online Shoppers' Confidence Act. I'd like my online shopping confidence restored. Me too.

And finally, Sean, Apple says it's dropping its Apple Pay Later program. This is a buy now, pay later service that the company launched in March of last year. Yeah, you could use it to pay for Apple products in four installments over six weeks, no fees, no interest. And this was for purchases between $50 and $1,000. Instead, the company says it's going to use existing Buy Now, Pay Later companies to do that job. And just a reminder to folks that these Buy Now, Pay Later offers aren't so dissimilar to credit cards, except that they break up payments into official installments. As long as you pay the final installment on time, you usually don't have any fees or interest. The key there is to pay off all the installments on time.

Yep. That's it for this week's money news. We always welcome your money questions and comments. Turn to the nerds and call or text us your questions at 901-730-6373. That's 901-730-NERD. Or send us a voice memo at podcast at nerdwallet.com. And remember, you can follow the show on your favorite podcast app, including Spotify, Apple Podcasts, and iHeartRadio to automatically download new episodes. Today's episode was produced by Tess Biglin and edited by Rick Vanderkneife. Sarah Brink mixed our audio. Here's episode was produced by Tess Biglin and edited by Rick VanderKneife. Sarah Brink mixed our audio. Here's our brief disclaimer. We are not financial or

investment advisors. This nerdy info is provided for general educational and entertainment purposes and may not apply to your specific circumstances. And with that said, until next time, turn to the nerds.