TO measure of consumer sentiment by the University of Michigan has increased in the last two months to its highest level since 1991. survey by the Federal Reserve Bank of New York found that Americans' inflation expectations have hit their lowest point in nearly three years. And the same survey, published last week, found that the proportion who expect their own finances to improve within a year is at its highest level since June 2021.
Economists say consumers appear to be responding to slowing inflation, rising incomes, lower gasoline prices and a rising stock market. Inflation has fallen from a peak of around 9% in June 2022 at 3.4%. According to the Federal Reserve's preferred price indicator, inflation has reached the level The Fed's 2% annual target when measured over the past six months.
What's more, wages have outpaced inflation over the past year, making it easier for Americans to adjust to a higher cost of living. Weekly earnings for the typical worker, halfway between top earners and top earners, rose 2.2% last year after adjusting for inflation, according to the report. The government reported last week.. By that measure, the inflation-adjusted salary is 2.5% higher than before the pandemic.
"While falling inflation took some time to affect consumer confidence, it appears the good news is finally coming," said Grace Zwemmer, an analyst at Oxford Economics.
Even with inflation steadily slowing, prices remain nearly 17% higher than three years ago, a source of discontent for many Americans. Although some individual products are becoming less expensive, overall prices are likely to remain well above their pre-pandemic levels.
That dichotomy – a rapid drop in inflation with a still high cost of living – will likely raise a key question in the minds of voters, many of whom still feel The lingering financial and psychological effects of the worst episode of inflation in four decades.. What will have more weight in the presidential election: the dramatic drop in inflation or the fact that most prices are much higher than three years ago?
Let's consider the price of food, one of the items that people encounter most frequently. Food inflation has plummeted from a year-on-year high of 13.5% in August 2022 to just 1.3%. However, a typical food basket still costs 20% more than it did in February 2021, just before inflation began to accelerate. On average, chicken prices have risen 25%. So is bread. Milk is 18% more expensive than before the pandemic.
The cost of renting an apartment has also skyrocketed and continues to rise faster than before the pandemic. Rental costs rose 6.5% from a year earlier, nearly double the pre-pandemic pace. At their peak in early 2023, rents were rising nearly 9% annually.
The much higher costs of necessities like food and rent continue to place a heavy burden on people like Romane Marshall, a 30-year-old software engineer who lives outside Atlanta.
In late 2020, Marshall took computer coding classes to try to move beyond the warehouse and customer service jobs he had previously held. When he was hired by a professional services consulting firm in April 2021, he was “ecstatic.” After completing an apprenticeship program the following year, his salary jumped from $50,000 to $60,000.
However, their expenses also continued to increase. When she moved to a new apartment to be closer to work as her company transitioned from full-time remote work to a hybrid schedule, her rent doubled to $1,475 a month, from the $700 she had paid for a room in her house. a friend.
Marshall says his typical grocery bill is now between $120 and $130, up from just $70 to $80 three years ago. To keep his electricity costs down, he only turns on the heat in his apartment from time to time.
"There have been some positive changes, it's just that things became expensive," he said. "The only thing I notice is that the price of food is still high."
Some Americans now have a brighter outlook. Hiring has remained strong, and the unemployment rate has remained below 4% for nearly two years, the longest period since the 1960s.
Dana Smith, a software developer, says she is optimistic that the economy is improving. Both he and his wife received wage increases that helped offset price increases over the past three years.
Smith, 40, lives in Matthews, North Carolina, about a half-hour from Charlotte, where he and his wife bought a home about three years ago. Since then, its value has increased by around 30%, increasing the wealth of their households.
"My perception," he said, "is that the economy is getting better and better."
Growing public optimism about the economy could signal new enthusiasm for Biden's candidacy this year, after weak polls have defined much of his tenure. Still, Ryan Cummings, an economist who has analyzed consumer confidence and how it is affected by political opinions, warned that politics could limit how much it can improve public sentiment.
Americans' economic prospects, he said, are increasingly driven by political partisanship rather than the underlying performance of the economy.
“As the election progresses,” Cummings said, “and it becomes clearer that the 2024 race will be Trump vs. Biden, Republicans could intensify their pessimism more than Democratic sentiment increases, sending sentiment back down regardless of economic fundamentals. .”
The University of Michigan survey found that consumer confidence among Democrats rose a strong 11.8% in January, the second-largest increase on record. (The biggest increase among Democrats came immediately after Biden's 2020 presidential victory.)
Many Americans could still favor the government taking action not only to curb inflation but also to try to reduce overall prices to where they were before the pandemic. In a classic 1997 research paper, Nobel Prize-winning economist Robert Shiller found that two-thirds of respondents to a survey he conducted agreed that the government should try to reverse a 20% increase in prices.
However, economists uniformly warn that any attempt to do so would require a significant weakening of the economy, as a result of sharp interest rate increases by the Federal Reserve or tax increases. The likely consequence could be a recession that would cost millions of jobs.
David Andolfatto, an economist at the University of Miami and former Federal Reserve economist, said it is better for wages to rise over time to allow people to adjust to higher prices.
"The cost of living is higher, salaries are higher," he said. “Let's just move on. There is no need for (the government) to lower the price level again. “It would be too painful.”
Claudia Sahm, founder of Sahm Consulting and also a former Fed economist, acknowledged that “people are angry” about rising prices.
“But then the next question is: can you afford it?” she asked. “Not everyone can say yes to that question. But over time, more and more people will be able to say yes.”
