Fed Declares Victory Over Inflation, But Americans Remain Skeptical

WASHINGTON — The Federal Reserve, with its recent aggressive interest rate cut, boldly proclaims that inflation has been tamed after a three-year battle. However, a significant portion of the public remains unconvinced.

Consumer surveys, including one released by the Associated Press-NORC Center for Public Affairs Research, reveal that a majority of Americans are still dissatisfied with the state of the economy, carrying the scars of inflation that reached a four-decade high two years ago during the pandemic recovery.

Despite these sentiments, economists argue that the shift towards steadily lower borrowing rates could eventually boost consumer confidence. Inflation has been steadily declining for over two years, almost returning to the Fed’s target of 2%. While prices continue to rise, the pace has significantly slowed down.

The cost of certain high-profile consumer goods, such as used cars and groceries, has even begun to fall. Historically, a stable, low inflation rate, where prices increase gradually, leads Americans to adapt to the higher price levels. A positive factor is the rise in average incomes, exceeding the rate of price increases, allowing more households to afford essential goods.

“A good definition of price stability,” Fed Chair Jerome Powell stated in a press conference, “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.”

Despite this optimistic outlook, Powell admitted that consumers are still grappling with “high prices, as opposed to high inflation,” which he acknowledged as a “painful” experience. However, he expressed confidence that “we’ve made real progress.”

Sofia Baig, an economist at Morning Consult, highlights that Americans still perceive high prices as a financial strain. Morning Consult surveys indicate that most individuals associate inflation with the significant price differences they witnessed two to four years ago. In contrast, Fed officials and economists typically evaluate success based on shorter-term price comparisons, such as year-over-year, six-month, or even month-over-month changes.

Over time, Baig explains, consumers generally adjust to higher prices, especially as their incomes catch up. She uses the analogy of her grandparents recalling the incredibly low price of a bottle of Coke, illustrating how inflation is an ongoing phenomenon that people eventually acclimate to.

The political climate also plays a role in shaping public perception of the economy. The relentless attacks on the Biden-Harris administration by former President Donald Trump and his Republican allies, primarily focused on inflation, have contributed to the economic gloom. Many economists emphasize that high inflation was a global phenomenon following the pandemic, primarily driven by part and labor shortages, affecting countries worldwide, including the United States.

The University of Michigan’s consumer sentiment survey reveals a stark contrast in economic outlook between Democrats and Republicans. Democrats’ economic sentiment is now more positive than it was on the eve of the pandemic in February 2020. Conversely, Republican sentiment has plummeted by nearly two-thirds. Among independents, sentiment remains 40% below its pre-pandemic levels.

Social media, with its abundance of photos and videos showcasing exorbitant prices, has also negatively impacted Americans’ perception of the economy, according to Baig.

Although average prices are unlikely to return to pre-pandemic levels, slower inflation can expedite the adjustment process. Groceries remain significantly more expensive than they were three years ago, but their increase over the past year has been limited to 0.9%. The average price of a gallon of gas has dropped by 17% from a year ago, reaching $3.22, according to AAA. In 14 states, it’s below $3. Apartment List data reveals a 0.7% decline in the cost of new rental leases over the past year.

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

Some Americans are experiencing a shift in their perception of prices. Tisha Deloney of Arlington, Virginia, initially felt disappointed when her company offered a smaller cost-of-living adjustment this year, around 3%, down from the 8% she remembers during peak inflation. However, when her rent increased two months ago, the rise was significantly smaller than in previous years.

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

Early indicators suggest that others may soon share Deloney’s sentiment. According to preliminary figures from the University of Michigan, consumer sentiment increased for the third consecutive month in September. This brighter outlook is attributed to “more favorable prices as perceived by consumers” for cars, appliances, furniture, and other durable goods.

Since 2022, Morning Consult has been surveying shoppers on whether the prices of goods and services they’ve purchased have been higher than expected. This measure has significantly declined from two years ago, indicating that many Americans are adapting to the higher costs.

While inflation remains a top concern for Americans, surveys indicate that they now expect it to stay low in the coming years. The Michigan survey revealed that expectations for inflation a year from now decreased for the fourth consecutive month in September, reaching 2.7%. This marked the lowest such figure since December 2020 and aligned with pre-pandemic levels.

In a CNBC interview on Friday, Christopher Waller, a vocal member of the Fed’s governing board, suggested that there’s even a risk of inflation falling well below the central bank’s 2% target in the coming months. Waller attributed this risk as a key reason behind his support for last week’s half-point rate cut.

Waller emphasized that excluding volatile food and energy costs, “core” prices rose at a mere 1.8% annual rate over the past four months. If inflation continues to cool at this pace, Waller indicated that he could support additional half-point rate cuts.

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