Why do economists say that lower inflation is not enough to relieve pressure on the US economy?
This disparity has led to bewilderment, outrage and curiosity on social media and in opinion columns.
Last week, the government reported that consumer prices did not rise at all in the September-October period, the latest sign that inflation is falling steadily from last year’s highs. A separate report showed that while Americans slowed their retail purchases in October compared to the rapid pace the previous month, they were still spending enough to drive economic growth.
However, according to an Associated Press-Center for Public Affairs Research poll last month, about three-quarters of respondents described the economy as poor. Two-thirds said their expenses had increased. Only a quarter said their income had decreased.
AP-NORC Poll: Many Americans say their expenses exceeded their earnings this year
This disconnect poses a political challenge for President Joe Biden as he prepares for his re-election campaign. Polls consistently show that most Americans disapprove of Biden’s handling of the economy.
Many factors lie behind this disconnect, but economists are increasingly pointing to one factor in particular: the lingering financial and psychological effects of the worst bout of inflation in four decades. Despite a steady slowdown in inflation over the past year, many goods and services are still much more expensive than they were just three years ago. Inflation – the rate at which costs rise – is slowing. But most prices are high and still rising.
Lisa Cook, a member of the Federal Reserve Board of Governors, explained this dynamic in her recent remarks at Duke University.
“Most Americans aren’t just looking for a decline in inflation” — that is, a slowdown in price increases, Cook said. “They’re looking for deflation. They want these prices to go back to what they were before the pandemic. … I hear that from my family.”
This is especially true for some of the goods and services Americans pay for most often: bread, beef, other groceries, apartment rents, and utilities. And every week or month, consumers are reminded how high these prices are.
Deflation – a widespread decline in prices – usually makes people and businesses reluctant to spend, and is therefore undesirable. Instead, economists say the goal is for wages to rise faster than prices so that consumers stay ahead.
How well inflation-adjusted incomes have fared since the outbreak of the pandemic is a complex question, because it is difficult because just one measure uses the experiences of nearly 160 million Americans.
Adjusted for inflation, median weekly earners — those in the middle of the income distribution — rose at an annual rate of just 0.2 percent from the last three months of 2019 through the second quarter of this year, according to calculations by Wendy Edelberg, a senior official. Fellow at the Brookings Institution. This small gain made many Americans feel that they had made little financial progress.
For Katherine Charles, a 40-year-old single mother living in Tampa, Florida, slowing inflation has not made it easier to make ends meet. Her rent jumped 15 percent in May. During the summer, in order to lower her electric bill, Charles turns off her air conditioning during the day despite Tampa’s sweltering hot weather.
She felt the need to cut back on her grocery shopping, even though her 16-year-old son and 10-year-old daughter are “at the age where they eat everything in front of them.”
“My son loves red meat,” Charles said. “We can no longer afford it the way we used to. The economy is not getting better for anyone, especially me.”
Charles, a call center representative at a company that handles customer service for health plans under the Medicare and Affordable Care Act, got a raise to $18.21 an hour two years ago. But it wasn’t a huge increase. She doesn’t even remember how big it was.
This month, Charles participated in a one-day strike against her employer, Maximus. She and her coworkers seek higher wages and affordable health insurance. Charles’s two children benefit from Medicaid, she said, because Maximus’ health insurance is very expensive.
Eileen Cassidy Rivera, a spokeswoman for Maximus, said a recent survey of its 40,000 employees found that three-quarters of those who responded said “they would recommend Maximus as a great place to work.”
“Over the past five years, we have increased compensation, reduced out-of-pocket health care expenses, and improved the work environment,” Rivera added.
Rising prices have been the main driver of a wave of strikes and other labor activism this year, as unions representing auto workers, truck drivers and pilots won big wage increases.
Read more: What the United Auto Workers will earn in their historic contracts
Other factors also play a role in why so many people are dissatisfied with the economy. Political partisanship is one of them. With Biden occupying the White House, Republicans are much more likely than Democrats to describe the economy as poor, according to the University of Michigan’s monthly survey of consumer sentiment.
Karen Dinan, a Harvard economist who served in both the George W. Bush and Obama administrations, notes that pronounced swings in economic sentiment occur after the inauguration of a new president, as voters from the party opposing the president quickly shift to a more negative view. .
“The partisan divide is stronger than it was before,” she added. “This is partly because the country has become more polarized.”
Yet many Americans, like Charles, still feel the pain of inflation. The national average price for a gallon of milk reached $3.93 in October, up 23 percent since February 2020, just before the pandemic hit. The price of a pound of ground beef is $5.35, which is 33 percent higher than it was at the time. Average gas prices, although down sharply from a year ago, are still 53 percent higher at $3.78 per gallon on average.
All of these increases far exceeded the rise in overall prices, which rose by about 19 percent over the same period.
Edelberg said the jump in prices of goods people typically buy helps explain why so many people are dissatisfied with the economy — even as Americans remain confident enough to keep spending at a healthy pace.
“Their purchasing power in general is in very good shape,” Edelberg said.
However, the broad national data do not reflect the experiences of ordinary Americans, many of whom have not seen their wages keep up with prices.
“In real terms, most people are probably very close to where they were before the pandemic,” said Brad Hirschbein, chief economist at the Upjohn Institute. “But there are a lot of exceptions.”
For example, lower-income Americans have generally received the largest percentage of wage gains since the pandemic. Fierce competition for front-line workers at restaurants, hotels, retailers and entertainment venues has forced companies to offer significant pay increases.
But the poor typically face a higher rate of inflation, according to economic research, because they spend a larger share of their income on volatile expenses such as food, gas and rent — items that have absorbed some of the largest price rises.
“At the lower end of the income distribution, people got somewhat higher wage increases,” said Anthony Murphy, senior economic policy adviser at the Federal Reserve Bank of Dallas. “But I don’t think that compensates for them for the fact that inflation has been much higher. They’re consuming a different set of goods than average.”
Census Bureau surveys studied by Murphy and his colleague Aparna Jayashankar show that nearly half of Americans say they are “very nervous” about inflation, little changed from the previous year, although inflation has declined since last year.
Even for people whose incomes have kept pace with prices, research has long found that people hate inflation more strongly than its economic impact might suggest. Most people don’t expect their salaries to keep up with rising prices. Even if that happens, the higher wage may come with a time lag.
“They’re obsessed with the fact that the prices they pay for the very high-profile things — gas, food, grocery store prices, rent — those things still seem high, even though they’re not increasing as quickly as they used to be,” Hirschbein said.
“If everyone lost their jobs, we would focus on that,” he said.