Living Well December 2, 2010, 5:33PM EST

Are Americans as Poor as They Feel?

It depends on what they buy. While some big-ticket expenditures have skyrocketed, the relative cost of many necessities has dropped

Story Tools

For many Americans, thinking back to the days of 99¢ gas and 50¢ cups of coffee, it may be cathartic to grumble about how expensive life has become, especially during the current economic downturn. The reality, however, is that a lot of things aren't as expensive as we think—and many things actually cost less in relative terms.

A look at the cost of living between 1980 and 2010 shows that nominal income rose more than overall consumer prices (nominal income is income not adjusted for inflation). The price of many day-to-day expenses such as food and even energy increased at a slower pace than overall consumer prices, which means their relative costs are lower, while some big-ticket items, such as education and health care, became more expensive, causing a shift in spending.

In 2009 the average household spent $49,067 on such expenses as housing, transportation, food, and entertainment—less than in 2008 but up by $3,692 (in 2009 dollars) since 1984—according to data from the U.S. Bureau of Labor Statistics Consumer Expenditure Survey.

To analyze how costs have changed, Businessweek.com compared the average price of some basic consumer expenditures today with the same expenses back in 1980, the year the U.S. Bureau of Labor Statistics began its ongoing consumer spending survey. Price data came from reports by the BLS and the nonprofit research group Council for Community and Economic Research, as well as other sources.

One New Cost: The Web

The results show that the relative price of such necessities as groceries and fuel decreased over the past 30 years, while the price of big-ticket items, such as health care and education, more than doubled. Also, many households added expenses for media and technology, such as computers and Internet and cell phone service, which add up to more than $1,000 per person per year, on average, reported The New York Times.

One factor driving the shift in costs: productivity. Barry Bosworth, senior fellow of economic studies at the Brookings Institution, says relative prices are down for such items as electronics, which have had rapid productivity gains over the decades.

Education has been one of the biggest contributors to spending increases. Since 1980 the average cost of college tuition and room and board more than doubled in real dollars (jumping nearly 500 percent in nominal dollars), to $20,435 in 2008 per year, according to the National Center for Education Statistics. The rise can be attributed to several factors, including declining state funding for public universities over the last decade, institutions' failure to educate more students with fewer resources, and spending on new technology and such services as student counseling, says Sandy Baum, an independent policy analyst for the College Board and professor of economics at Skidmore College.

Premium for College Education

The increase may seem steep, but Bosworth says the returns on college education have also increased: In 1980 the average college graduate earned 30 percent more than a high school graduate, and prior to the recession, the premium had expanded to more than 60 percent, according to a paper by the National Bureau of Economic Research.

The emphasis on education also indirectly affected the cost of living, argue Harvard Law School professor Elizabeth Warren and writer Amelia Warren Tyagi in The Two-Income Trap (Basic Books, 2003). As good school districts attracted demand for homes in a community, home buyers engaged in bidding wars that drove up home prices. Many bought homes they could not afford.

In real dollars, the median existing home price in 2006 was up about 40 percent from 1980 levels, according to data from the National Association of Realtors. The gap has narrowed as values have dropped nearly one-fourth from peak levels. Spending on homes, rentals, and vacation properties increased to 20.5 percent of total expenditures in 2009, from 15.9 percent in 1984, BLS data shows.