Understanding What “REAL” Means in Economics

When I taught high school economics, the concept of “REAL” was perhaps the most important lesson after covering scarcity. Simply put, “real” means adjusted for inflation.

Each school year, I asked my students how many heard a grandparent (or anyone else) ever say something like, “When I was a kid, we could go to the movies for a dime.” Or, “a loaf of bread used to cost a nickel.” All raised their hands. When asked what context was missing from these statements, they did understand that goods and services were cheaper “back in the day” and, of course, the pay was lower too.

As they say, it’s all relative.

The central question really is this: are folks better off now than compared to a different time. In other words, is a four-door sedan, a gallon of milk, or a three-bedroom ranch in Peoria more or less expensive now than in, say, 1981? Of course, all three, as with most items, were cheaper 40 years ago.

But you have to use “real” dollars, again adjusted for inflation, to know for sure.

For now, let’s stick to comparing prices with one year ago. Are folks better off now than in August 2020?

The answer is a resounding no.

Many seniors live on fixed incomes. They have little if any, way to augment what they receive each month. The $1,500 per month one received at the start of 2021 is on par to be worth just $1,425 per month due to prices spiking at a 5% annual clip. True, eventually, a cost of living adjustment will be provided for Social Security recipients, but that just allows people to keep up, and well after they have already been paying higher prices across the board. No one gets ahead.

Savings accounts are still paying near zero percent, with certificates of deposit barely at 1%. That means for every $1,000 one has saved, it becomes $950 after 12 months. In other words, your “real” return on your savings is minus 5%. There are few places for retirees to get better than a 5% return without taking on more risk. Accepting risk in the stock market is fine for those in their working years. Younger people have the time to recover from the next downturn. Not so with seniors.

But even many workers are worse off with the Biden inflation. Employers have indeed raised wages recently, around 4%. But enter the concept of “real” again. If prices are rising at 5%, and your income is rising at only 4%, you are losing 1%. You are still worse off.

Are people noticing this?

According to a June Fox News national poll, they are. More than 8 in 10 Americans asked said they were very or extremely concerned about inflation. Further, about 7 in 10 said that recent rises in gas and food prices were causing hardships for their families.

Will there be political fallout from all this in 2022?

Republicans hope so, and Democrats are starting to fear they will be held to account for the price spikes exacerbated by runaway government spending.

Michael Ceraso, a progressive Democratic strategist, told Fox News that, “Republicans are running a brilliant playbook, period. Low-middle-class workers, especially from black and brown communities, feel the economic burden tenfold when the value of their dollar shrinks. These folks won’t turn out for Democrats if they lack an economic incentive or if Trump is missing from the ticket.” Ceraso even conceded further that, “Flooding their pockets with child care tax credits and monthly payments is great but doesn’t recoup the financial losses.”

Jeff Szymanski works in political communications for AMAC. He previously taught high school economics for 15 years.