Listen to this article
WASHINGTON — The Federal Reserve cut its benchmark interest rate by a half-point last week, more than usual, underscoring its belief that inflation has been all but conquered after three long years.
The general public? Not really.
Consumer surveys, including one released Friday by The Associated Press-NORC Center for Public Policy Research, find that a majority of Americans are still unhappy with the economy after inflation hit a 40-year high two years ago as the economy recovered from the pandemic recession.
But some economists say the move to steadily lower borrowing rates could eventually boost consumer confidence. Inflation has been falling for more than two years and is nearly back at the Fed’s 2% target. That means prices are still rising overall, just at a much slower rate.
Prices of high-profile consumer goods, from used cars to groceries, are actually falling. Economic history shows that a low and stable rate of inflation that allows prices to rise only slowly eventually helps Americans adjust to higher price levels. One favorable factor is that average incomes are rising faster than prices, allowing more households to afford necessities.
The issue remains a hotly debated topic in the political campaign. Seeking to tap into public discontent, former President Donald Trump has blamed the Biden-Harris administration’s policies for surging inflation. But an Associated Press poll on Friday found that voters are now nearly evenly split on whether Trump or Vice President Kamala Harris would be better able to manage the economy. An Associated Press poll in June found that 6 in 10 people dislike President Joe Biden’s economic performance.
This is a sign that Americans’ economic outlook is starting to brighten, at least from a political perspective.
Little noticed at Chairman Jerome Powell’s press conference on Wednesday was his projection that the Fed’s preferred August inflation rate will be just 2.2% when it is released this week, down from a peak of 7% two years ago.
Powell also offered a colloquial definition of the Fed’s mission to pursue “price stability.”
“A good definition of price stability is when people don’t think about inflation when making their day-to-day decisions. Everybody goes back to the question, ‘What is inflation?’ and we want inflation to be low and stable,” he said.
Powell did not suggest the Fed had fully achieved its goal. He acknowledged that consumers are still “experiencing high prices, not high inflation,” which he called “painful.” But he added, “I think we’ve made real progress.”
Sophia Baig, an economist at Morning Consult, a polling firm, said Americans still see high prices as a financial burden. She said Morning Consult research shows that when people think about inflation, most think about how low prices were two to four years ago. By contrast, Fed officials and economists typically measure success over shorter time periods, such as comparing prices to a year ago, six months ago or even a month ago.
Baig said it’s normal for consumers to adjust to higher prices over time, especially as their income increases.
“You’ve probably heard your grandparents talk about how ridiculously cheap a bottle of Coca-Cola is,” she says, “so inflation is always going to happen, but at some point you just accept the new price and get used to it.”
Some of the gloom around the economy may have been exacerbated by three years of political attacks by President Trump and his Republican allies against the Biden-Harris administration, with a relentless focus on inflation. Many economists point out that soaring inflation is a post-pandemic global phenomenon, driven mainly by parts and labor shortages that have been as severe abroad as they are in the U.S.
According to the University of Michigan Consumer Sentiment Survey, Democrats’ economic outlook is brighter now than it was on the eve of the pandemic in February 2020. In contrast, sentiment among Republicans has plummeted by nearly two-thirds. Among independents, sentiment is still 40% below pre-pandemic levels.
Neil Mahoney, a Stanford University economist, says his research suggests the hit to consumer confidence from spikes in inflation fades by about 50% each year, but he said politics have become more of a factor in this election.
“There’s a tug of war between fading inflation concerns and rising partisanship heading into the election,” said Mahoney, who served as an adviser to the Biden administration in 2022-23.
Baig also said the influence of social media, which is filled with photos and videos of consumers pointing out exorbitant prices, is clouding Americans’ economic outlook.
Average prices are unlikely to return to pre-pandemic levels, but a drop in inflation could help speed up the adjustment process. Groceries prices are still significantly higher than they were three years ago, but they’ve only increased 0.9% over the past 12 months. The average price of a gallon of gasoline has fallen 17% from a year ago to $3.22, according to AAA, and is below $3 in 14 states. The cost of signing a new lease of life is down 0.7% over the past year, according to Apartment List data.
And median household income will rise 4% faster than inflation in 2023, marking the first increase in inflation-adjusted income since the pandemic, the Census Bureau reported this month.
Indeed, some Americans believe prices are stabilizing. Tisha Deloney of Arlington, Virginia, said she was initially upset when her company reduced her cost-of-living adjustment this year to about 3%, down from 8% when inflation was at its peak. But when her rent increased two months ago, it was by a much smaller amount than last year.
“It feels more normal,” said Deloney, 38. “Inflation has definitely gone down. I feel better.”
There are some signs that others may soon start feeling the same way. Consumer sentiment rose for a third straight month in September, according to preliminary data from the University of Michigan. The brighter outlook was driven by “more favorable prices for consumers” for cars, appliances, furniture and other long-lasting goods.
Morning Consult has been surveying consumers since 2022 about whether the cost of goods and services they bought was higher than expected. The measure has declined from two years ago, suggesting that many Americans are adjusting to rising costs.
Surveys show people continue to cite inflation as their top concern, but expect it to remain low for the next few years. Michigan surveys showed inflation expectations one year out fell for the fourth consecutive month in September to 2.7%, the lowest since December 2020.
On Friday, outspoken Fed board member Christopher Waller suggested in an interview with CNBC that there’s even a risk that inflation could fall well below the central bank’s 2% target in the coming months. Waller said this was his main reason for supporting last week’s half-point rate cut.
Waller noted that “core” prices, which exclude volatile food and energy costs, have risen just 1.8 percent at an annualized rate over the past four months.
Waller said he might support another half-percentage point cut if inflation continues to fall at its current pace.
“Inflation is easing at a much faster pace than I thought it would,” he said.
