One Quick Question: Inflation, Consumer Price Index, cost of living: do any of these numbers actually measure affordability?

Inflation and affordability are all over the news these days, especially after fall reports came out indicating inflation has dropped to the lowest level in months. At the same time, we’re seeing headlines about America’s affordability crisis. To help untangle it all, we reached out to James McCafferty, co-director of Western Washington University’s Center for Economic and Business Research (CEBR), for some answers.

Q: How do we reconcile the latest economic headlines around inflation and affordability? What's the difference between inflation, Consumer Price Index, and cost of living?

A: I often think about the old parable of the blind men and the elephant. Each person touches a different part — an ear, a leg, a tusk — and describes something completely different. None of them are wrong, but none of them are seeing the whole animal. That’s a useful way to think about today’s economic headlines.

Inflation, the Consumer Price Index (CPI), and cost of living are all measuring different things. Inflation is about the rate of change in prices — how fast prices are rising or falling overall. CPI is one of the main tools we use to measure that change. It tracks the price of a fixed basket of goods and services each month and reports a single national number.  

That single number is useful, but it has limits. CPI assumes everyone buys the same mix of goods every month, even though real households substitute when prices change and seldom buy all the items in the basket. It also doesn’t capture differences across regions, incomes, or household types. And in any given month, a small number of volatile items — like vehicles during the pandemic — can drive the headline figure even if most everyday prices feel unchanged. Most recently, CPI data released has relied on only partial data collection, making the most recent numbers suspect.

Cost of living, by contrast, is what people usually mean when they talk about affordability. It asks a different question: how much does it actually cost to maintain a household in a specific place, and how does that compare to wages? When we calculate cost of living, we track hundreds of items multiple times a year across regions. That’s how we can say, for example, that the cost to live in the Seattle area is roughly 30 percent above the national average, while Bellingham is closer to 20 percent — even though average wages differ across those places as well.

This disconnect helps explain why inflation can be cooling while affordability still feels strained. We’re also living in what economists describe as a K-shaped economy. Depending on your income, assets, and job stability, your personal economic experience may be improving — or getting worse — at the same time as the overall economy shows positive signs.

That matters for public policy. Terms like “affordable” sound clear, but they often lack a shared definition. Are we talking about basic needs like housing and food, or a standard of living people have come to expect? The affordability crisis includes both. Without clarity, policy debates risk talking past each other — like arguing over different parts of the elephant.

So yes, the data show an affordability problem. Rising consumer debt, increased food-bank usage, and growing pressure on safety-net services all point in that direction. But markets alone don’t solve for affordability or health or housing security. Markets optimize for efficiency and profit. Public policy is where we decide what outcomes we want — and how we measure whether we’re achieving them.

James McCafferty is the co-director of Western Washington University’s Center for Economic and Business Research (CEBR). Housed in Western’s College of Business and Economics, CEBR employs students, staff and faculty from across WWU as well as outside resources to assist businesses, government entities and nonprofits by developing reports based on academic approaches and rigor with a neutral analysis perspective. CEBR’s projects and initiatives include primary research, data analysis, producing economic profiles, economic impact reports, a quarterly Puget Sound Economic Forecaster report, the After Hours with the Puget Sound Economic Forecaster podcast in between quarterly reports, and daily updates on LinkedIn, Facebook, and Instagram.

Coming next week, the second in this series about understanding the economy, its data, and how it pertains to you.

Jennifer Nerad covers Western's College of Business and Economics and College of the Environment for the Office of University Communications. Have a great story idea? Reach out to her at neradj@wwu.edu.