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The issue is that you are not average, which is what the CPI uses. The average American doesn't live in NY or SF and doesn't pay student loans for an elite institution.

Here's the issue I see: the rich cities have decoupled from the rest of the American economy. Rich cities are experiencing very high inflation, while poorer parts of the country experience no inflation, or even deflation.

The Fed only has one lever. It cannot make money expensive in SF while making it cheap in Detroit.

When I visit family in Idaho, I'm sort of shocked how rich I am. But in Seattle I'm squarely middle class. The divide seems to be growing very quickly.

When I visit family in Idaho, I'm sort of shocked how rich I am. But in Seattle I'm squarely middle class. The divide seems to be growing very quickly.

This is mostly an issue of cities restricting housing supply, especially through height limits and parking minimums: http://www.amazon.com/Rent-Too-Damn-High-Matters-ebook/dp/B0....

Last year authorities in the Houston metropolitan area, with a population of 6.2m, issued permits to build 64,000 homes. The entire state of California, with a population of 39m, issued just 83,000.

Want to be rich? Get out of Seattle, California, and New York.

Oh look, this comment again. California doesn't need a bunch of new permits yet because since the boom & bust there have been literally entire neighborhoods of unfinished (builder went bankrupt or whatever) residential construction. On top of that you can build pretty much wherever you want east of the 5.

It's hilarious that you mention parking minimums; a friend of mine moved his industrial business to Idaho because, hey, cheap real estate. Then found out the building he bought wasn't going to work unless he spent some ridiculous 6 figure sum building more parking spaces, the number of which is determined by building square footage and not the actual number of people. It's definitely not a California-only thing.

There's probably a causal relationship between the effects you describe. Because the Fed sees prices as deflating in Idaho or Detroit (flyover country is a large portion of the aggregate stats), they pump more money into the economy. They pump more money in by dealing with financial firms in NYC, who then invest that money in VC firms in Silicon Valley, who fund startups because that seems to be where most of the money congeals. As a result, prices rise dramatically in NYC and the Bay Area, but very little of the money actually gets to the Midwest, South, or Mountain states.

"Helicopter" Ben Bernanke was roundly mocked for his comment that the Fed should just throw money out of helicopters, but that would probably be both more equitable and yield faster, more easily controlled effects on the economy.

> But what I see is the cost of these things skyrocketing: education, housing, and health care. That is -- the things that real people actually need!

You have to be careful about that, because in those areas there are confounding factors. I went to Georgia Tech in the early 2000's, and paid about $60k for my degree. Today it'd cost well over $100k. But it's also a totally different product. More services, fancier buildings, smaller classes, etc. Also, these institutions aren't growing as more and more people go to college. Instead, they're lowering admissions rates and becoming more elite products. The admissions rate at many top universities is half of what it was when we went to college.

Same thing with healthcare and housing. People are using more and better healthcare than before, and living in bigger houses. I grew up in an 1,100 square foot three-bedroom built in the 1960's. Such a common floor plan at the time that my wife grew up in an almost identical house on the other side of the country. That's about the size of your typical two-bedroom apartment in this area now. And the neighborhood is also a different product. What was a sleepy D.C. suburb 20 years ago is now at the heart of urbanization in the area. Rents in places like New York and San Francisco and DC are skyrocketing, but again they're much more desirable products today. When I was growing up in the 1990's, middle class people didn't go to D.C. except to work or see the museums. They wouldn't dare live there.

The story on healthcare is complicated, but growth in healthcare costs has actually slowed dramatically in the last few years.

http://www.huffingtonpost.com/2014/12/03/health-care-spendin...

http://www.modernhealthcare.com/article/20141223/NEWS/312239...

Also on housing: http://www.bloomberg.com/bw/articles/2014-07-01/the-re-explo...

The Bay Area (and probably New York) are alternate housing realities that have nothing to do with the larger picture of the economy.

And housing costs in the Bay Area can mostly be explained by a bizarre alliance between left progressives and wealthy homeowners who both somehow think of the view from their bedroom windows as a basic human right.

Can someone explain this to me? [...] the cost of these things skyrocketing: education, housing, and health care

Yes: See Tyler Cowen's books The Great Stagnation and Average is Over.

Interestingly, someone else asked this question about a year ago, and I'll give the same answer I did then: https://news.ycombinator.com/item?id=7315908:

Take a look at Matt Yglesias's The Rent Is Too Damn High (http://www.amazon.com/dp/B0078XGJXO); many "fun" municipalities like Seattle have restricted development to the point that housing is extremely expensive. If you move from Seattle to, say, Houston or Dallas, you'll probably see your effective rent shrink by 35 – 50%.

Secondly: see Tyler Cowen's books The Great Stagnation and Average is Over. Those books are too sophisticated and deep (though they're quite readable) to summarize here, but the shortish version is that Western economies are undergoing a lot of profound shifts driven by a combination of technology and Baumol's cost disease.

in the last couple years have been rent, medical, and dental in that order

Alex Tabarrok's Launching the Innovation Renaissance is also good: regarding medicine and dentistry, part of the issue is Baumol's Cost Disease and part of it is the powerful lobbies that restrict entry into those fields through licensing regimes and other means.

Finally, a general note: be wary of any answers in this thread that don't cite any sources and ideally those sources should be books. The issue is too complex for simple answers, and the simple answers that one tends to hear also tend to be wrong or missing a lot of important information.

The most commonly referenced measure of inflation is the Consumer Price Index, tied to the increase in price of a "market basket of consumer goods and services." The BLS chooses sample goods/service in categories like housing, medical care, apparel, etc.

I believe the core CPI figures leave out food and energy, since their prices are sometimes more volatile. So, the CPI does include healthcare and education, but I suppose those price increases must be outweighed by price decreases in other sectors.

[edit] In addition, there are "weights" for goods in different categories. Ex. in the document I found from 2013[1], the weights add up to 100, with housing-related items having a total weight of ~41.4. Healthcare is 7.5 and education 7.0.

So, the actual CPI numbers are somewhat manufactured. The weights correspond to what the BLS predicts the average family spends, proportionally, on those different goods. If your expenditures don't match those proportions, you will "feel" inflation at a different level in your own purchasing.

[1] http://www.bls.gov/cpi/cpiri_2013.pdf

Education: I graduated in 2001 from an Ivy League university. It cost $32K a year as far as I remember. The same thing costs $50K or so now? That's a pretty astounding increase in such a short time.

An increase of 56% in 14 years is only 3.2% per year. Sure, that's more than the 2.0% average inflation rate, but I wouldn't say that it's an astounding increase.

That's probably true, but at least in my school, the greatest increases had been in the last few years. When I graduated in 2008, 2009 tuition was increasing something along the lines of 7.4% Probably the majority of that 14 years it went up relatively slowly and has gone up much more lately.

They're lying, by intentionally either miscalculating inflation or not counting things that are inflating a lot. This isn't unique to the Fed of course, seemingly most governments and central banks do it (whether China or Venezuela). By lying they acquire room to inflate at a higher rate, to fake growth, bury entitlements, devalue debt, and trick some of the population into thinking things are getting better (while the real standard of living declines or moves sideways).

This is the difference between macroeconomics and microeconomics. Macroeconomics studies the economy as a whole using a set of very broad principles, while microeconomics looks at smaller segments with their own domain-specific rules.

Education: There is an artificial restriction on the number of "good" universities. As demand for Ivy League schools increases, supply does not, so people are willing to pay more and more for it. It takes many years to build up a school's reputation. Also, the US Government guarantees student loans, so while the financial system would normally correct this by appropriately incorporating risk when issuing loans to students attending sub-par schools, they do not in this case. But some pull-back is happening; specifically with law schools.

Housing: This is a relatively recent issue, but essentially it's the same thing as education: there are only so many "desirable" places to live, but an increasing demand for them. The supply of housing in popular areas can't increase as quickly as demand; it can take a decade or more just to acquire the land to build a dense multi-family structure on top of a block of row homes. The bay area also has a lot of problems in that it tries to protect existing communities by making it pretty difficult to build anything, which ultimately just drives up the price of housing. NYC has other issues because globally, wealthy people see it as a status symbol to have an apartment in Manhattan and London. They buy it as an investment and often don't use it, but this prices out people who live in the area.

Health Care: This is a whole other subject; pricing in health care is largely NOT driven by supply and demand. It's closer to extortion; if I tell you that you're going to die or be disabled unless you pay me $50,000; you're going to pay me. Congress has shown little appetite to actually fix the problem: there are too many middlemen with opaque pricing, and consumers will pay whatever they have to when it comes to their health. Prices will continue to rise until people start to demand action.

Inflation is measured by a basket of goods that are weighted by consumer expenditure on them. In short you can make your own index that measures changes in the important for you prices - "yourflation", but that is not what inflation is and there is no conspiracy there.

In my country in addition to the headline CPI number there is another basket with items consumed by the poor and also a calculator on the website which helps you figure out your personal inflation by having you specify on what you spend your money on. You could try the BBC version for the UK: http://www.bbc.com/news/business-22523612

You can get a great education today, but there are essentially no more spots at the Ivies than 20 years ago, so if you want the best-in-breed college degree[1], it's much harder because there is more competition.

You can get housing much easier than a generation ago, although there is a trend to be bigger. If you want to be in the best area[1], there are only so many spots and they are not being produced anywhere near enough.

If you want 1960s health care today, it's dirt cheap. But most people want the latest and greatest in health care, personally delivered by doctors. Labor is expensive.

[1] however you define that

IANAE. Education and housing could both be considered assets (i.e. you put money in, then get it out again later, plus/minus some gain). Not that I'm implying that either are currently a good investment, just that wrt to deflation, they should be thought of assets. I would assume that in a deflationary environment (with static wages) disposable income would increase, which would cause money to flow to assets, and push up their prices. Again, IANAE.

Education, and Health Care are still very labor intensive. The benefit the author talks about wrt Moore's law hasn't yet made a serious dent in either... quite simply, computers haven't displaced humans yet, as they have in many other fields. Nearly everything else has become more industrial over time, making it relatively cheaper.

Education may never be fully automated - it is still (over-simplifying it a bit) one prof talking to a bunch of students a couple of times a week. On-line courses are fantastic, but young people still need coaching and inspiration coming from other humans.

What is interesting is that, while the model of education has not changed, higher education costs had increased by 8-10% above inflation over the past 20 years.

The money was not spent on research/learning. It went to build up spa-like amenities (gyms, swimming pools, etc), but primarily to administration personnel. Loads and loads of senior vice presidents and chancellors. But wait, the best paid profession in education? University sports coaches: http://deadspin.com/infographic-is-your-states-highest-paid-...

I hope online courses can provide some deflationary effect, and force re-focusing on research and learning which should be all that education is about.