Last week, the Federal Reserve reaffirmed its opinion that it had nearly defeated inflation after three long years by implementing a larger-than-usual half-point decrease to its main interest rate.
The general population? Very little.
Most Americans are still dissatisfied with the economy, according to consumer surveys (e.g., one that came out on Friday from The Associated Press-NORC Center for Public Affairs Research), which is understandable given that inflation reached a four-decade high two years ago while the economy was recovering from the pandemic recession.
Some economists, however, believe that consumer confidence could rise in the long run as a result of the trend toward steadily reduced borrowing rates. For almost two years, inflation has been falling, and it is almost back at the Federal Reserve’s 2% target. Price increases are still occurring, but they are happening at a somewhat slower rate.
Some prominent consumer commodities have actually been seeing price drops, including used vehicles and supermarket prices. American consumers tend to adjust to increasing prices over time when inflation is moderate and steady and price increases are gradual, according to economic history. More people are able to afford basic needs thanks to average salaries that are growing at a faster rate than costs.
In the electoral campaign, the issue is still very contentious. Ex-President Trump is trying to cash in on public dissatisfaction by claiming that the actions of the Biden-Harris administration were to blame for the dramatic increase in inflation. However, according to an AP poll conducted on Friday, respondents are now evenly divided over whether Trump or Vice President Kamala Harris would be better suited to manage the economy. Six out of ten people were unhappy with President Joe Biden’s track record on the economy, according to a June AP survey.
That bodes well for the future of American economic policy, at least when viewed through the political lens.
Chair Jerome Powell’s prediction that the Federal Reserve’s preferred inflation gauge would equal to just 2.2% for August when the report is revealed this week was mostly unnoticed during a news conference he gave on Wednesday. This is a significant decrease from 7% two years ago.
A more informal explanation of the Federal Reserve’s duty to pursue “price stability” was also offered by Powell.
According to him, “a good definition of price stability” is when individuals don’t factor inflation into their everyday decisions. Everyone longs to return to the state of affairs, to the question, “What’s inflation?” Just make sure it stays low and steady.
That the Fed had achieved its aim was not implied by Powell. He voiced his disapproval of consumers’ “painful” experiences with “experiencing high prices, as opposed to high inflation.” However, he did say, “I believe we’ve made real progress.”
Americans continue to perceive rising prices as a financial burden, according to economist Sofia Baig of the polling firm Morning Consult. She noted that study results from Morning Consult show that when most people consider inflation, they recall how much cheaper costs were a few years ago. Economists and Fed officials, on the other hand, tend to look at prices compared to a year, six months, or even one month ago as a measure of success.
Baig stated that customers usually adapt to price increases over time, especially when their earnings rise to match the costs.
“Your grandparents can be heard complaining about how cheap a Coke bottle is,” she remarked. So, inflation has always been a part of life. However, as you adjust to the new pricing, it becomes less of a problem.
Trump and his Republican supporters have been persistently attacking the Biden-Harris administration for three years, focusing on inflation. This has undoubtedly added to the economic pessimism. After the epidemic, excessive inflation was observed worldwide, according to several economists. This was due mostly to labor and parts shortages, and it was just as bad in other countries as it was in the US.
The consumer sentiment poll conducted by the University of Michigan indicates that Democrats currently hold a more optimistic view of the economy compared to February 2020, just before the epidemic. On the other hand, roughly two-thirds of Republicans’ sentiment has dropped. Independents’ mood remains 40% worse than it was before the outbreak.
Baig adds that the abundance of consumer-generated content on social media—including images and videos—has contributed to a pessimistic outlook on the economy among Americans.
Slower inflation can aid in the transition process, even though average prices will probably not go back to pre-pandemic levels. Although food prices have increased by only 0.9% in the last year, they are still much higher than they were three years ago. Gas prices have dropped 17% year-over-year, with the average gallon now costing $3.22, according to AAA. Less than $3 in fourteen states. According to data compiled by Apartment List, the average price of a new lease has decreased by 0.7% over the last 12 months.
Additionally, the Census Bureau announced this month that median family income increased by 4% in 2023, which was the first increase in income after inflation since the epidemic.
In the eyes of some Americans, prices are finally leveling out. The 3% cost-of-living increase that Tisha Deloney of Arlington, Virginia, received from her employer this year was much smaller than the 8% she recalled receiving during the height of inflation, and she was first irritated about it. However, compared to past years, the increase in her rent two months ago was far smaller.
“It felt more normal,” spoke 38-year-old Deloney. I can say with confidence that inflation has decreased. So much better.
There are some preliminary indicators that other individuals might soon have a similar sentiment. Preliminary data from the University of Michigan shows that consumer sentiment rose for the third consecutive month in September. The improvement in sentiment was prompted by “more favorable prices as perceived by consumers” for durable goods such as cars, appliances, furniture, and the like.
Morning Consult has been polling consumers since 2022 to find out if they’ve ever paid more than they anticipated for a product or service. Since its peak two years ago, that metric has fallen, suggesting that many Americans are coping with the increased expense of living.
A lot of people are still worried about inflation, but studies show that they think it will stay low for the foreseeable future. Inflation forecasts for the next year declined for a fourth consecutive month to 2.7% in September, according to the Michigan survey. That number is in line with levels seen before the outbreak and is the lowest since December 2020.
An outspoken member of the Federal Reserve’s governing board, Christopher Waller, expressed his support for last week’s half-point rate cut in an interview with CNBC on Friday. Waller went on to say that there’s a chance that inflation could fall significantly below the central bank’s 2% target in the next months.
According to Waller, “core” prices increased at a mere 1.8% yearly pace over the previous four months, when volatile food and energy expenses are excluded.
Further half-point rate decreases would have Waller’s backing if inflation maintained its present rate of decline.
“I didn’t anticipate inflation to soften at this rate,” he remarked.