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 a three-year long hiatus.
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 a steady decline in borrowing rates could eventually improve consumer confidence. Inflation has been falling for more than two years and is nearly back at the Fed’s 2% target. This means prices are still rising overall, but 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.
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 said, “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. When people think about inflation, they’re likely thinking about how low prices were two to four years ago, she said. 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 a bottle of Coca-Cola was ridiculously cheap,” 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 high inflation following the pandemic-induced recession was a global phenomenon, severe in the U.S. and abroad as well, driven in large part by shortages of parts and labor. Inflation was exacerbated the following year by Russia’s invasion of Ukraine, which caused food, oil and gasoline prices to soar.
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.
