Fed Declares Victory Over Inflation, But Americans Remain Skeptical

WASHINGTON — The Federal Reserve, buoyed by its recent half-point interest rate cut, believes it has largely tamed inflation after a grueling three-year battle. However, a majority of Americans remain unconvinced, still grappling with the lingering effects of a price surge that reached a four-decade high two years ago.

Consumer surveys, including one released Friday by The Associated Press-NORC Center for Public Affairs Research, reveal a persistent economic unease among Americans. Despite the Federal Reserve’s optimism, many remain wary of the long-term impact of inflation, which, while declining, still weighs heavily on household budgets.

Economists, however, argue that the shift towards lower borrowing rates could eventually boost consumer confidence. Inflation has steadily decreased for over two years and is nearing the Fed’s 2% target. While prices are still rising, they are doing so at a much slower pace. Notably, costs for some prominent consumer items, from used cars to groceries, have even begun to fall.

Historical trends suggest that a stable, low inflation rate, characterized by gradual price increases, eventually causes Americans to adapt to higher price levels. A positive factor is the recent acceleration of average income growth surpassing price increases, enabling more families to afford necessities.

This economic landscape remains a central issue in the political arena. Former President Donald Trump, seeking to capitalize on public dissatisfaction, has blamed the Biden-Harris administration’s policies for the inflation spike. Yet, Friday’s AP poll indicates that voters are now evenly divided on who they believe would better handle the economy: Trump or Vice President Kamala Harris. In contrast, a June AP poll found that 60% of Americans disapproved of President Joe Biden’s economic record.

This shift in public perception, at least through a political lens, suggests a gradual improvement in Americans’ economic outlook.

A key point, largely overlooked during Chair Jerome Powell’s Wednesday press briefing, was his prediction that the Fed’s preferred inflation gauge would reach only 2.2% for August, when the figures are released this week. This represents a significant drop from the peak of 7% two years ago.

Powell also provided a relatable definition of the Fed’s mission to achieve “price stability.”

“A good definition of price stability,” he stated, “is that people in their daily decisions, they’re not thinking about inflation. That’s where everyone wants to be — back to, ‘What’s inflation?’ Just keep it low, keep it stable.”

Powell refrained from claiming complete victory over inflation. He acknowledged that consumers are still experiencing “high prices, as opposed to high inflation,” which he described as “painful.” However, he added, “I think we’ve made real progress.”

Sofia Baig, an economist at the polling firm Morning Consult, noted that Americans still perceive high prices as a financial burden. She explained that when most people consider inflation, they think about how much lower prices were two or four years ago. In contrast, Fed officials and economists typically evaluate success in shorter-term periods, comparing prices to those from a year, six months, or even one month ago.

Baig pointed out that consumers generally adjust to higher prices over time, especially as their incomes catch up.

“You hear your grandparents talking about a bottle of Coke costing some egregiously low amount,” she shared. “So inflation has always been happening, but, at a certain point, you kind of take in the new prices and get used to it.”

Some of the pessimism surrounding the economy has likely been amplified by the relentless political attacks launched by Trump and his Republican allies against the Biden-Harris administration, focusing relentlessly on inflation. Numerous economists have pointed out that high inflation was a global phenomenon after the pandemic, primarily fueled by parts and labor shortages, and was just as severe overseas as it was in the United States.

According to the University of Michigan’s consumer sentiment survey, Democrats’ outlook on the economy is more positive now than it was on the eve of the pandemic, in February 2020. Conversely, sentiment among Republicans has plummeted by almost two-thirds. Among independents, sentiment remains 40% below its pre-pandemic level.

Baig also attributes the dimming view of the economy to the influence of social media, which has been flooded with photos and videos of shoppers highlighting exorbitant prices.

While average prices are unlikely to revert to pre-pandemic levels, slower inflation can facilitate the adjustment process. Groceries remain significantly more expensive than they were three years ago, but their prices have only increased by 0.9% over the past 12 months. The average cost of a gallon of gas has plummeted 17% from a year ago, reaching $3.22, according to AAA. In 14 states, it’s below $3. The cost of a new rental lease has decreased by 0.7% over the past year, according to figures from Apartment List.

And in 2023, median household income rose 4% faster than prices, marking the first gain in inflation-adjusted income since the pandemic, as reported by the Census Bureau this month.

Some Americans are witnessing a stabilization of prices. Tisha Deloney of Arlington, Virginia, initially felt disappointed when her company provided a smaller cost-of-living adjustment for this year, approximately 3%, down from the 8% she remembers when inflation peaked. However, when her rent increased two months ago, it rose by a significantly smaller amount compared to previous years.

“It felt more normal,” said Deloney, 38. “I definitely feel like inflation has come down. It feels better.”

Early indications suggest that others may soon share this sentiment. Consumer confidence rose for the third consecutive month in September, according to preliminary figures from the University of Michigan. This brighter outlook was driven by “more favorable prices as perceived by consumers” for cars, appliances, furniture, and other durable goods.

Since 2022, Morning Consult has conducted surveys asking shoppers whether the costs of goods and services they have purchased were higher than they expected. This metric has declined from two years ago, suggesting that many Americans are adjusting to higher costs.

While surveys continue to identify inflation as a leading concern, consumers now anticipate it to remain low in the coming years. The Michigan survey found that expectations for inflation a year from now decreased in September for the fourth consecutive month, reaching 2.7%. This was the lowest such figure since December 2020 and aligns with pre-pandemic levels.

On Friday, Christopher Waller, a vocal member of the Fed’s governing board, suggested in an interview on CNBC that there is even a risk that inflation could fall well below the central bank’s 2% target in the coming months. This, Waller stated, is a key reason why he supported last week’s half-point rate cut.

Waller pointed out that, excluding volatile food and energy costs, “core” prices increased at just a 1.8% annual rate over the past four months. He also expressed that, if inflation continues to cool at its current pace, he could support additional half-point rate cuts.

“Inflation,” he concluded, “is softening much faster than I thought it was going to.”