The Economy Looks Fine on Paper and Feels Worse in the Checkout Line — and the Shoppers Have the Math Right

By the scoreboard, the economy’s having a perfectly respectable year. It added 162,000 jobs in August, output grew 2.1% over the past year, and inflation has cooled to 3.4% from its 9.1% peak in 2022. And yet 45% of Americans tell Gallup the economy is poor, while only 19% call it good or excellent. There’s no shortage of theories for the gap — survey quirks, partisanship. Erik Hurst, an economist at the University of Chicago, offers a shorter answer: ‘People aren’t wrong.’

The rate fell. The prices didn’t.

Here’s the trick the headline number plays. A lower inflation rate means prices are rising more slowly, not that they’ve come back down, and the price level is what you actually pay. Consumer prices sit 28% above where they were just before the pandemic; real hourly earnings are up just 2.8% over the same span. Averages hide the damage, too. A working paper by Hurst and colleagues found that 34% of workers’ pay failed to keep pace from late 2020 to late 2025, and a bit more than a tenth lost over 3.5% a year. This year hasn’t helped: prices rose 2.1% from December through July, pay 1.7%.

Then there’s what the official index leaves out. The 30-year mortgage was 6.71% last week, against 3.51% in January 2020, and the Atlanta Fed figures it takes $124,674 a year to afford a median-priced home. A gauge that counts home prices and interest rates would be up more than 40% since January 2020, by one Harvard economist’s math. And because people tend to credit a raise to their own hard work, watching prices eat it feels like a pay cut nobody agreed to.

Your portfolio pays the same toll

The same arithmetic runs through your investments, just more politely. In Spencer Jakab’s example, $10,000 compounding at 10% for 20 years produces a $57,275 gain — and with 3% inflation, about half of the gain is simply prices going up. Over the last five calendar years, the S&P 500 returned 14.3% a year before inflation and 9.5% after. The tax bill still lands on the whole gain. Indexing gains to inflation has come up in Congress again, but one estimate puts the cost near $1 trillion over a decade if applied retroactively, and the top fifth would collect more than ten times what the bottom fifth would. Jakab doubts it happens.

So grade the plan in real dollars. A projection that pairs pre-inflation returns with today’s prices is grading itself on a curve. The rain already fell here, so there’s no umbrella to hunt for; the job now is checking whether the plan got wet. Bring the projection and find the inflation line. It’s the most important number nobody reads.