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The cost of money is part of the cost of living

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  • Bolhuis, Marijn A.
  • Cramer, Judd N.L.
  • Schulz, Karl Oskar
  • Summers, Lawrence H.

Abstract

As the US economy bounced back from the post-pandemic inflation surge, consumer sentiment remained depressed even though unemployment was low, and inflation was falling. This confounded economists, who historically rely on these two variables to gauge how consumers feel about the economy. We propose that borrowing costs, which grew at rates they had not reached in decades, do much to explain this gap. The cost of money is not currently included in traditional price indexes, indicating a disconnect between the measures favored by economists and the effective costs borne by consumers. We show that the lows in US consumer sentiment that cannot be explained by unemployment and official inflation are strongly correlated with borrowing costs and consumer credit supply. Concerns over borrowing costs, which have historically tracked the cost of money, were at their highest levels since the Volcker-era. We then develop alternative measures of inflation that include borrowing costs and can account for almost three-quarters of the gap in US consumer sentiment in 2023.

Suggested Citation

  • Bolhuis, Marijn A. & Cramer, Judd N.L. & Schulz, Karl Oskar & Summers, Lawrence H., 2026. "The cost of money is part of the cost of living," Economics Letters, Elsevier, vol. 259(C).
    • Handle: RePEc:eee:ecolet:v:259:y:2026:i:c:s0165176525005658
    DOI: 10.1016/j.econlet.2025.112728
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    References listed on IDEAS

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    1. Marijn A Bolhuis & Judd N L Cramer & Lawrence H Summers, 2022. "Comparing Past and Present Inflation [Supply and demand in disaggregated Keynesian economies with an application to the covid-19 crisis]," Review of Finance, European Finance Association, vol. 26(5), pages 1073-1100.
    2. Marijn A. Bolhuis & Judd N. L. Cramer & Karl Oskar Schulz & Lawrence H. Summers, 2024. "The Cost of Money is Part of the Cost of Living: New Evidence on the Consumer Sentiment Anomaly," NBER Working Papers 32163, National Bureau of Economic Research, Inc.
    3. Marijn A Bolhuis & Judd N L Cramer & Lawrence H Summers, 2022. "The Coming Rise in Residential Inflation [The repeat rent index]," Review of Finance, European Finance Association, vol. 26(5), pages 1051-1072.
    4. Gillingham, Robert, 1983. "Measuring the Cost of Shelter for Homeowners: Theoretical and Empirical Considerations," The Review of Economics and Statistics, MIT Press, vol. 65(2), pages 254-265, May.
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