The Fed Claims Inflation Fight Success; Will Public Opinion Follow?

In a recent move, the Federal Reserve made a substantial half-point reduction to its key interest rate, signaling its confidence that inflation has largely been tamed after a challenging three years. However, this optimism isn’t shared by many Americans, who continue to grapple with the economic fallout from a pandemic-era inflation spike.

Recent surveys, including one conducted by The Associated Press-NORC Center for Public Affairs Research, reveal that the majority of Americans are still dissatisfied with the economy. Many consumers remain haunted by an inflation peak two years ago that set a 40-year record, and they are just now feeling the effects of the economy’s recovery.

Yet some economists argue that the ongoing decrease in borrowing costs could gradually enhance consumer confidence. Inflation rates have been consistently declining for over two years and are nearing the Fed’s target of 2%. While overall prices are indeed rising, the pace is much more manageable than before.

Particularly notable is the drop in prices for essential consumer goods like used cars and groceries, which has contributed to a more stable economic environment. Historically, periods of low and steady inflation lead consumers to adjust their perception of price levels. Furthermore, rising average incomes, outpacing price growth, provide families with greater purchasing power.

The topic of inflation remains contentious within the current political climate. Former President Donald Trump has claimed that the current administration’s policies are to blame for inflation’s rise. However, according to the latest AP poll, voters are now nearly divided on whether Trump or Vice President Kamala Harris would manage the economy better. Just a few months earlier, disapproval rates of President Biden’s economic policies were significantly higher.

This shift in public opinion could indicate a slight improvement in Americans’ economic outlook. Jerome Powell, the Chair of the Federal Reserve, revealed in a recent press conference that the preferred inflation measure is expected to show a rate of just 2.2% for August, a remarkable decline from a substantial 7% peak.

Powell described “price stability” in relatable terms, emphasizing that individuals shouldn’t have to think about inflation in their daily lives. While he acknowledged that consumers are still facing high prices in certain areas, he expressed optimism, stating, “I think we’ve made real progress.”

According to Sofia Baig, an economist with Morning Consult, many Americans perceive high prices as an ongoing financial strain. Surveys indicate that when people think about inflation, they often do so in comparison to lower prices from previous years, while economists tend to focus on more recent comparisons. Over time, Baig believes that consumers generally adjust to elevated price levels, especially as their income rises.

Baig also pointed out the impact of social media on public perception. Throughout the past three years, visuals showcasing soaring prices have contributed to a pessimistic view of the economy.

While it is unlikely that average prices will return to pre-pandemic levels, a trend of slower inflation could facilitate a smoother adjustment for consumers. For example, despite higher grocery costs over the last three years, the annual increase was only 0.9% in the past year. Additionally, the average price for a gallon of gas has decreased by 17%, now sitting at $3.22 in many areas, with some states reporting prices below $3.

Recent reports indicate a 4% rise in median household income, faster than inflation rates, marking the first inflation-adjusted income growth since the pandemic. Some consumers are beginning to feel a positive shift; for instance, Tisha Deloney from Arlington, Virginia, noticed that her company’s cost-of-living adjustment felt more reasonable than in previous years, corroborating her impression that inflation rates have indeed lessened.

Early data suggest that consumer sentiment is on a positive trajectory, with September showing a third consecutive month of improvement in outlook according to preliminary figures from the University of Michigan. This increase is attributed to consumers perceiving better pricing for durable goods.

Since 2022, metrics measuring shoppers’ perceptions of the cost of goods have seen a downward trend, indicating that many Americans are starting to adapt to elevated prices. While inflation remains a core concern, expectations for sustained low inflation in upcoming years are growing, as highlighted by the Michigan survey, which reported a decline in inflation expectations to 2.7%, the lowest since December 2020.

Analyzing the current scenario, Christopher Waller, a prominent member of the Fed’s board, acknowledged in a recent interview the possibility that inflation might fall below the Fed’s 2% target soon, which influenced his support for the recent rate cut. He also mentioned that prices, excluding volatile sectors like food and energy, are rising at a modest rate of 1.8% annually.

If the cooling of inflation continues, Waller indicated that he would be open to endorsing further rate cuts, adding, “Inflation is softening much faster than I thought it was going to.”