Official measures of inflation are missing a major part of the cost of living—and its absence may explain why people feel so glum about the economy at a time of plentiful jobs and cooling inflation.

That’s according to a working paper published Monday by economists at Harvard University and the International Monetary Fund who examined how today’s high interest rates on mortgages, credit cards and other loans—which are not considered in official measures of inflation such as the Consumer Price Index—hurt household budgets and affect people’s feelings about the economy. 

The research proposes a straightforward solution to the puzzle of why people have been giving gloomy assessments of the economy in recent months when hard data shows it’s doing just fine, on paper at least. 

The University of Michigan’s index of consumer sentiment, a measure of how people feel about the economy and their own finances, has been hovering near its lowest in decades. That’s despite the unemployment rate being near a 50-year low, and inflation having fallen to a relatively tame 3.1% annual rate from its height of 9.1% in June of 2022, according to the Consumer Price Index. 

“Consumers, unlike modern economists, consider the cost of money part of their cost of living,” wrote Marijn Bolhuis, an economist at the IMF, together with Harvard economists Judd Cramer, Karl Oskar Schulz and Lawrence Summers.

Since early 2022, the Federal Reserve has sharply raised its benchmark interest rate to combat inflation, which has pushed up borrowing costs for mortgages, auto loans, credit cards, and other consumer loans. The idea is to discourage borrowing and spending and slow the economy so that inflation cools. From the perspective of household budgets though, it’s like fighting inflation with another kind of inflation.

High interest rates have pushed car payments over $1,000 a month for many buyers, and between high interest rates and high prices, mortgage payments for a newly bought home have gone through the roof. The typical monthly payment for a median home was $2,111 in December, nearly double the $1,083 average payment in January 2020 just before the pandemic hit, according to data from the Federal Reserve Bank of Atlanta.

However, official measures of inflation, such as the Consumer Price Index, only account for the price of goods and services, not loan interest, so they miss much of that hit to household budgets.

“Given that home prices remain at historic highs despite higher interest rates, the interest payment on a new 30-year mortgage for the average house has increased more than threefold since 2021. The interest payment on a new car loan has increased more than 80% since the start of the pandemic," the researchers wrote. "It is not surprising that this would affect how consumers feel about the economy.”

Historically, moderate inflation and low unemployment made measures of consumer sentiment go up. Currently, consumer sentiment is far lower than what the data would suggest it should be, based on historical patterns, the researchers noted. Experts have reached for various explanations for the gap, including increasingly polarized partisanship, and even “vibes.”

If the research is correct, it’s really just about dollars and cents after all. If you recalculate inflation to include loan interest, more than 70% of the gap goes away, they found. Including interest makes the inflation of the past few years much more dramatic, with inflation peaking at 18% in November 2022, nearly double the 9.1% peak in June 2022 according to the official measure.

It also would mean that the data economists use to take the temperature of the economy have become disconnected from the financial realities that people face in their everyday lives, especially for major purchases that are typically made on credit, like houses and cars.

“Since these purchases are integral to American consumers’ sense of their economic well-being but their full price is not included in official inflation measures, it is no wonder that sentiment lags traditional measures of economic performance,” they wrote.