With its larger-than-usual half-point cut to its key interest rate last week, the Federal Reserve reiterated its belief that inflation has been defeated after three long years.
Society as a whole? Not so much.
Consumer surveys, including one released Friday by the Associated Press-NORC Center for Public Affairs Research, show that most Americans are unhappy with the economy, still weighed down by inflation that has risen over the past fourteen years as the economy has taken off. recession.
However, according to some economists, the transition to gradually decreasing lending rates may increase consumer sentiment. Inflation has dipped for more than two years and is almost back to the Fed’s 2% target. While that means prices are still rising, they are doing so very slowly.
The cost of certain high-end consumer goods, from used cars to grocery prices, has been falling. Economic history suggests that low, stable inflation, and slowly rising prices, eventually lead Americans to adjust to higher price levels. Another favorable factor is that incomes are now rising faster than prices, allowing more households to make ends meet.
The issue remains a hot topic in the political campaign. Seeking to capitalize on public discontent, former President Donald Trump blamed the policies of the Biden-Harris administration for causing inflation to rise. But Friday’s AP poll found voters are now split on who they think will manage the economy better, Trump or Vice President Kamala Harris. Back in June, an AP poll found that six in 10 disapprove of President Joe Biden’s economic record.
That’s a sign that, at least from a political prism, Americans’ economic views have begun to change.
Not much attention was paid to the press conference that Chairman Jerome Powell gave on Wednesday that his estimates that the inflation gauge chosen by the Fed will be only 2.2% in August when the figure is released this week. That would be down significantly from 7% two years ago.
Powell also offered a unified explanation of the Fed’s mandate to seek “price stability.”
“A good explanation for price stability,” he said, “is that people in their daily decisions, don’t think about inflation.” That’s where everybody wants to be – after, ‘What is inflation?’ Keep it low, keep it stable.”
Powell did not suggest that the Fed was fully successful in that goal. He acknowledged that consumers are still facing “high prices, compared to high inflation,” which he said is “painful.” But, he added, “I think we’ve made real progress.”
Sofia Baig, an economist at polling firm Morning Consult, noted that Americans still see high rates as a financial burden. According to the Morning Consult poll, he said, when most people think about inflation, they think about how low prices were two or four years ago. Fed officials and economists, by contrast, often measure success in the short term — rates compared to the past year, the past six months, or even the past one month.
Over time, Baig said, consumers tend to adjust to higher prices, especially as their income increases.
“You hear your grandparents talking about the cheapest bottle of Coke,” he said. So inflation has been happening, but, at some point you take the new rates and get used to it.”
Some of the darkness surrounding the economy may have been exacerbated by the political attacks Trump and his Republican allies have waged for three years against the Biden-Harris administration, which has focused heavily on deflation. Many economists have noted that inflation was a global phenomenon after the pandemic, caused mainly by shortages of parts and labor, and was as bad overseas as it was in the United States.
According to a survey of consumer sentiments by the University of Michigan, the opinion of Democrats on the economy is more positive now than before the pandemic, in February 2020. The sentiment among Republicans, on the contrary, has decreased by almost two-thirds. Among independents, sentiment is still 40% below its pre-pandemic level.
Baig also pointed to the influence of social media, which has been flooded with photos and videos of consumers pointing out exorbitant prices, to cloud Americans’ perception of the economy.
Although average prices will not return to where they were before the pandemic, slower inflation may help speed up the adjustment process. Groceries are still more expensive than they were three years ago, but over the past 12 months they have risen by 0.9%. The average cost of a gallon of gas is down 17% from last year, to $3.22, according to AAA. In 14 states it is less than $3. The cost of new leases has fallen by 0.7% over the past year, figures from the Leasing Scheme show.
And in 2023, median household incomes rose 4% faster than prices, the first gain in variable income since the pandemic began, the Census Bureau reported this month.
Some Americans see prices as stable. Tisha Deloney of Arlington, Virginia, said she was initially upset when her company offered a small cost-of-living increase this year of about 3%, down from the 8% she remembers when inflation was running high. But when his rent went up two months ago, it went up by a much smaller amount than in previous years.
“It felt normal,” said Deloney, 38. “I really feel like the inflation has gone down. It feels better.”
Some early signs indicate that other people may feel the same way soon. Consumer sentiment rose in September for the third month in a row, according to preliminary data from the University of Michigan. The bright outlook was driven by “favorable prices as perceived by consumers” for cars, appliances, furniture and other durable goods.
Starting in 2022, Morning Consult surveyed consumers on whether the cost of the goods and services they purchased turned out to be more expensive than they expected. That rate is down from two years ago, a sign that more Americans are adjusting to higher costs.
And while people continue to cite inflation as a priority, according to the survey, they now expect it to remain low for years to come. The Michigan survey found that inflation expectations a year from now fell in September for the fourth straight month to 2.7%. This was the lowest number since December 2020 and is in line with pre-pandemic levels.
On Friday, Christopher Waller, a member of the Fed’s governing board, suggested in an interview with CNBC that there is even a risk that inflation may fall below the central bank’s target of 2% in the coming months – an important reason, said Waller. that he supported a half-point rate cut last week.
Waller noted that, excluding volatile food and energy costs, “core” prices rose at an annualized rate of just 1.8% over the past four months.
If inflation continues to cool at its current pace, Waller said, he could support an additional half-point rate cut.
“Inflation,” he said, “is slowing down a lot faster than I thought it would.”
– Christopher Rugaber, AP Economics writer
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