September 15, 2024
WASHINGTON (AP) — Most Americans are not celebrating about the plummeting of inflation in the face of the high borrowing rates the Fed engineered by raising interest rates. A majority of Americans in some surveys still complain about elevated prices, given that the costs of such necessities as food, gas and housing remain far above where they were before the pandemic erupted in 2020.
This despite Fed chair Jerome Powel's high-profile speech last month where he came the closest he ever had to declaring that the inflation surge that gripped the nation for three painful years was now essentially defeated.
And not only that. The Fed's high interest rates, Powell said, had managed to achieve that goal without causing a widely predicted recession and high unemployment.
The relatively sour mood of the public is creating challenges for Vice President Kamala Harris as she seeks to succeed President Joe Biden. Many voters say they're dissatisfied with the Biden-Harris administration's economic record — and especially frustrated by high prices.
That disparity points to a striking gap between how economists and policymakers assess the past several years of the economy and how many ordinary Americans do.
In his remarks last month, given at an annual economic symposium in Jackson Hole, Wyoming, Powell underscored how the Fed's sharp rate hikes succeeded much more than most economists had predicted in taming inflation without hammering the economy — a notoriously difficult feat known as a “soft landing.”
“The 4-1/2 percentage point decline in inflation from its peak two years ago,” he noted, "has occurred in a context of low unemployment — a welcome and historically unusual result.”
With high inflation now essentially conquered, Powell and other central bank officials are preparing to cut their key interest rate in mid-September for the first time in more than four years. The Fed is becoming more focused on sustaining the job market with the help of lower interest rates than on continuing to fight inflation.
Many consumers, by contrast, are still preoccupied with today's price levels.
Now, according to the Fed’s preferred measure, inflation is 2.5%, not far above its 2% target. And while a weaker pace of hiring has caused some concerns, the unemployment rate is at a still-low 4.3%, and the economy expanded at a solid 3% annual rate last quarter.
Measures of consumer sentiment, though, indicate that three years of hurtful inflation have dimmed many Americans’ outlook. In addition, high loan rates, along with elevated housing prices, have led many young workers to fear that homeownership is increasingly out of reach.
Last month, the consulting firm McKinsey said that 53% of consumers in its most recent survey “still say that rising prices and inflation are among their concerns.”
Research by Stefanie Stantcheva, a Harvard economist, and two colleagues found that most people's views of inflation are very different from those of economists. Economists tend to regard inflation as a consequence of strong growth. They often describe inflation as a result of an “overheating” economy: Low unemployment, strong job growth and rising wages lead businesses to sharply increase prices without necessarily losing sales.
By contrast, a survey by Stantcheva found, ordinary Americans “view inflation as an unambiguously bad thing and very rarely as a sign of a good economy or as a byproduct of positive developments.”
Her survey respondents also said they believed that inflation stems from excessive government spending or greedy businesses. They “do not believe that (central bank) policymakers face trade-offs, such as having to reduce economic activity or increase unemployment to control inflation.”"How much unemployment or slowdown in growth should we be willing to accept to shorten the length of time that inflation is too high?”
