The Fed sees its inflation fight as a success. Will the public
eventually agree?
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[September 23, 2024] By
CHRISTOPHER RUGABER
WASHINGTON (AP) — With its larger-than-usual half-point cut to its key
interest rate last week, the Federal Reserve underscored its belief that
it's all but conquered inflation after three long years.
The public at large? Not so much.
Consumer surveys, including one released Friday by The Associated Press-NORC
Center for Public Affairs Research, show that most Americans remain
unhappy with the economy, still bruised by an inflation rate that hit a
four-decade high two years ago as the economy rebounded from the
pandemic recession.
Yet in the view of some economists, the shift toward steadily lower
borrowing rates could eventually boost consumer sentiment. Inflation has
sunk for more than two years and is nearly back down to the Fed's 2%
target. Though that means overall prices are still rising, they're doing
so much more slowly.
The costs of some high-profile consumer goods, from used cars to grocery
prices, have actually been falling. Economic history suggests that a
low, stable inflation rate, with prices rising only gradually,
eventually leads Americans to adapt to higher price levels. One
favorable factor is that average incomes are now rising faster than
prices, allowing more households to afford necessities.
The issue remains a heated one in the political campaign. Seeking to
capitalize on public discontent, former President Donald Trump has
blamed the Biden-Harris administration's policies for having caused
inflation to spike. Yet Friday's AP poll found that voters are now
roughly split on who they think would better handle the economy, Trump
or Vice President Kamala Harris. Back in June, an AP poll had found that
six in 10 disapproved of President Joe Biden's economic record.
That is a sign that, at least seen through a political prism, Americans'
economic views have begun to brighten.
Little noticed in a news conference Chair Jerome Powell gave Wednesday
was his estimate that the Fed's preferred inflation gauge would amount
to just 2.2% for August when the figure is released this week. That
would be down dramatically from a peak of 7% two years ago.
Powell also provided a colloquial definition of the Fed's mandate to
seek “price stability.”
“A good definition of price stability," he said, "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 did not suggest that the Fed had fully succeeded in that goal. He
acknowledged that consumers are still “experiencing high prices, as
opposed to high inflation,” which he said is “painful.” But, he added,
“I think we’ve made real progress.”
Sofia Baig, an economist at the polling firm Morning Consult, noted that
Americans still see high prices as a financial burden. According to
Morning Consult surveys, she said, when most people think about
inflation, they think about how much lower prices were two or four years
earlier. Fed officials and economists, by contrast, typically measure
success in shorter-term durations — prices compared with a year ago, six
months ago, even one month ago.
Over time, Baig said, consumers typically adjust to higher prices,
particularly as their incomes catch up.
“You hear your grandparents talking about a bottle of Coke costing some
egregiously low amount,” she said. “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 gloom surrounding the economy has likely been heightened by
the political attacks Trump and his Republican allies have waged for
three years against the Biden-Harris administration, focused
relentlessly on inflation. Many economists have noted that high
inflation was a global phenomenon after the pandemic, caused largely by
shortages of parts and labor, and was just as severe overseas as it was
in the United States.
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A row of unsold 2024 Atlas utility vehicles is shown July 28, 2024,
at a Volkswagen dealership in Denver. (AP Photo/David Zalubowski,
File)
According to the University of
Michigan's consumer sentiment survey, Democrats' outlook on the
economy is more positive now than on the eve of the pandemic, in
February 2020. Sentiment among Republicans, in contrast, has plunged
by nearly two-thirds. Among independents, sentiment is still 40%
below its pre-pandemic level.
Baig also cites the influence of social media, which has been rife
with photos and videos of consumers pointing to exorbitant prices,
for dimming Americans' view of the economy.
Though average prices won't likely return to where they were before
the pandemic, slower inflation can help speed the adjustment
process. Groceries still cost much more than they did three years
ago, but in the past 12 months they've risen just 0.9%. The average
cost of a gallon of gas has plummeted 17% from a year ago, to $3.22,
according to AAA. In 14 states it's below $3. The cost of a new
rental lease is down 0.7% in the past year, figures from Apartment
List show.
And in 2023, median household income rose 4% faster than prices, the
first gain in inflation-adjusted income since the pandemic, the
Census Bureau reported this month.
Some Americans do see prices as settling down. Tisha Deloney of
Arlington, Virginia, said she was initially miffed when her company
provided a smaller cost-of-living adjustment for this year of about
3%, down from the 8% she remembers when inflation was peaking. But
when her rent rose two months ago, it ticked up by a much smaller
amount than it had in previous years.
“It felt more normal,” said Deloney, 38. “I definitely feel like
inflation has come down. It feels better.”
Some early signs suggest that other people may soon feel the same
way. Consumer sentiment rose in September for a third straight
month, according to preliminary figures from the University of
Michigan. The brighter outlook was driven by “more favorable prices
as perceived by consumers” for cars, appliances, furniture and other
long-lasting goods.
Since 2022, Morning Consult has surveyed shoppers on whether the
costs of goods and services they've bought have been pricier than
they expected. That measure has tumbled from two years ago, a sign
that many Americans are adjusting to higher costs.
And while people continue to cite inflation as a leading concern,
according to surveys, they now expect it to remain low in the coming
years. The Michigan survey found that expectations for inflation a
year from now fell in September for the fourth straight month to
2.7%. That was the lowest such figure since December 2020 and
consistent with pre-pandemic levels.
On Friday, Christopher Waller, an outspoken member of the Fed’s
governing board, suggested in an interview on CNBC that there's even
a risk that inflation could fall well below the central bank's 2%
target in the coming months — a key reason, Waller said, that he
supported last week's half-point rate cut.
Waller noted that, excluding volatile food and energy costs, “core”
prices rose at just a 1.8% annual rate in the past four months.
If inflation kept cooling at its current pace, Waller said, he could
support additional half-point rate cuts.
“Inflation," he said, “is softening much faster than I thought it
was going to.”
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