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WASHINGTON – Inflation has reached its lowest level in two and a half years. The unemployment rate remained below 4% for the longest period since the 1960s. And the U.S. economy has repeatedly defied predictions of an impending recession. But according to a series of polls, most Americans have a bleak view of the economy.
Inequality has led to confusion, despair and curiosity on social media and opinion columns.
Last week, the government reported that consumer prices did not rise at all from September to October, the latest sign that inflation is steadily cooling from last year’s highs. A separate report showed that while Americans slowed their retail purchases in October from the previous month’s brisk pace, they still spent enough to fuel economic growth.
Still, about three-quarters of respondents described the economy as poor, according to an Associated Press-NORC Center for Public Affairs Research poll last month.
The discrepancy between the data and individual perceptions poses a political challenge for President Joe Biden as he prepares for his re-election campaign. Polls consistently show that most Americans disapprove of Biden’s handling of the economy.
Many factors are responsible for the discrepancy, but economists are increasingly pointing to one in particular: the ongoing financial and psychological impact of the worst inflation in four decades. Inflation may be slowing, but many goods and services are still significantly more expensive than they were three years ago
Lisa Cook, a member of the Federal Reserve Board of Governors, captured this dynamic in recent remarks at Duke University.
“Most Americans,” Cook said, “are not just looking for disinflation” — a slowing of price increases. “They expect deflation. They want these prices to return to pre-pandemic levels. … That’s what I hear from my family.”
That’s especially true for some of the goods and services that Americans pay for most: bread, beef and other groceries, housing rent and utilities. Every week or month, consumers are reminded of how much these prices have risen.
Deflation – a widespread fall in prices – typically makes people and businesses reluctant to spend money and is therefore undesirable. Rather, economists say, the goal is for wages to rise faster than prices so that consumers still come out ahead.
How inflation-adjusted incomes have changed since the pandemic is a complicated question because it is difficult to capture the experiences of some 160 million Americans with just one metric.
Average weekly earnings — those in the middle of the income distribution — rose just 0.2% per year, adjusted for inflation, from the last three months of 2019 to the second quarter of this year, according to calculations by Wendy Edelberg, a senior fellow at the Brookings Institution . This meager gain has likely left many Americans feeling like they have made little financial progress.
For Katherine Charles, a 40-year-old single mother from Tampa, Florida, slowing inflation hasn’t made making ends meet any easier. Their rent increased by 15% in May. To keep her electric bill low, Charles kept the air conditioning turned off during the day in the summer, despite Tampa’s scorching hot weather.
She felt the need to limit grocery shopping even though, she said, her 16-year-old son and 10-year-old daughter are “at the age where they eat everything that comes to mind.”
Charles, a call center representative for a company that provides customer service for Medicare and Affordable Care Act health insurers, received a raise to $18.21 an hour two years ago. But it wasn’t a big increase. She can’t even remember how big it was.
Other factors also play a role in why many people are still dissatisfied with the economy. Political partisanship is one of them. With Biden in the White House, Republicans are far more likely than Democrats to call the economy bad, according to the University of Michigan’s monthly survey of consumer sentiment.
Karen Dynan, a Harvard economist who served in both the George W. Bush and Obama administrations, found that there are significant swings in economic sentiment after the inauguration of a new president, with the Voters of the party that opposes the president quickly shift to a more negative opinion.
“The partisan divide is stronger than before,” she said. “Partly because the country is more polarized.”
At the same time, comprehensive national data does not capture the experiences of millions of ordinary Americans, many of whom have not seen their wages keep up with prices.
“The reality is that most people are probably pretty close to pre-pandemic levels,” said Brad Hershbein, a senior economist at the Upjohn Institute. “But there are many exceptions.”
Lower-income Americans, for example, have generally received the largest percentage wage increases since the pandemic. Fierce competition for frontline workers in restaurants, hotels, retailers and entertainment venues forced companies to raise significant wages.
But poorer people tend to face higher rates of inflation, according to economic research, because they spend more of their income on such volatile expenses as groceries, gas and rent – items that have absorbed some of the biggest price spikes.
Even for people whose incomes have kept pace with prices, research has long found that people hate inflation more than its economic impact suggests. Most people don’t expect their salary to keep up with rising prices. Even if this is the case, there may be a delay in receiving the higher payment.
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