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Why Americans are feeling bad about inflation despite a good economy
Americans despise inflation.
It’s an aversion that influences your perception of the economy and your personal finances. And even if the Federal Reserve achieves its hitherto unmet 2% inflation target, it won’t be enough to assuage that repulsion for most people.
In fact, if it were up to them, Americans would choose to have no inflation at all.
These are some of the findings from two recent studies that explore how Americans feel about inflation, whether those feelings can change, and what policymakers should do about that feeling.
The biggest complaint people have about inflation? This harms their standard of living, forcing Americans to adjust their budgets by purchasing smaller quantities or lower quality products.
“It is especially important to understand how people feel about this, since it is clear that people suffer from this and have many negative emotional and stress responses,” Stefanie Stantcheva, author of one of the studies and professor of political economy at Harvard University, wrote to Yahoo Finance.
Case in point: A record share of Americans say inflation remains their top financial concern, for a recent Gallup poll. It has heavy confidence despite robust job growth since the start of 2021 and an unemployment rate that has remained below 4% for 27 consecutive months.
See more information: Inflation slowed down in April – see how this affects your portfolio
‘Engrained perceptions’
The topic evokes as much antipathy now as it did nearly three decades ago.
That’s when acclaimed economist Robert Shiller decided to find out why consumers don’t like inflation so much. What he discovered still resonates with Americans today, according to Stantcheva’s study, which raises many of the same questions Shiller posed.
Three-quarters of participants in Stantcheva’s study believe that inflation erodes their purchasing power, about the same as the 77% who responded the same in Shiller’s 1996 study. And 80% of respondents in the recent study think that prices are outpacing wages, although hourly wage growth has exceeded inflation since February 2020.
See more information: How does the job market affect inflation?
Americans also reject any positive aspects associated with inflation, with 70% in Stantcheva’s study saying that “inflation indicates a bad state of the economy”, echoing Shiller’s conclusions.
“It is interesting to see that the main reasons and sentiments are very similar to those of the mid-1990s, despite all the changes that the US economy has witnessed since then,” Stantcheva wrote. “This suggests that these are ingrained perceptions, beliefs and attitudes that are perhaps not as sensitive to current events.”
The story continues
A customer takes a carton of eggs from the refrigerator of a supermarket in Washington, DC, on Saturday, April 6, 2024. (Tom Williams/CQ-Roll Call, Inc via Getty Images) (Tom Williams via Getty Images)
‘Meat of this project’
So what is the ideal inflation rate for Americans? A according to recent study caused this, revealing a huge gulf between what consumers want and the Fed’s goal.
On average, Americans prefer an annual inflation rate of 0.20%, well below the central bank’s 2% target and far from where inflation currently stands – 3.4% last month.
“That’s the essence of this project,” said Raphael Schoenle, one of the researchers on the second study and an economics professor at Brandeis University. “Very few people want more than the Fed’s perceived target.”
Demographic and socioeconomic characteristics are the strongest predictors of people’s preferred inflation rate, the study found. For example, the elderly and those whose income comes mainly from wages prefer lower inflation, while those with more assets favor higher inflation on average.
Economic reasoning also plays a role – although of lesser importance.
The researchers tested this by exposing survey participants to one of five economic theories – two providing reasons for higher inflation and three providing reasons for lower inflation.
Afterwards, participants were asked again about their preferred inflation rate and which of the five inflation theories contributed to their preference.
Several theories changed participants’ preferred inflation rate, but only one had a statistically significant effect on inflation preferences: that wages do not keep up with inflation and reduce purchasing power.
After being exposed to wage inflation theory, respondents’ preferred inflation rate was 1 percentage point lower than all other theories.
“If I wanted to draw a conclusion from this before doing more studies, [it] is that if you want people to agree to higher inflation, maybe you need to alleviate the worry that inflation will erode their wages,” Schoenle said. “Because when they are approached with this idea, they become more hesitant about to rising inflation.”
A customer fills up at a Shell station on May 15, 2024 in Miami, Florida. (Photo by Joe Raedle/Getty Images) (Joe Raedle via Getty Images)
‘Capturing people’s reality’
The distance between the rate of inflation that Americans consider acceptable and what the Federal Reserve prefers complicates their efforts – at least in the court of public opinion.
While the 2% target is the widely accepted standard for central banks around the world, researchers in both studies argue that it is important for policymakers to consider consumer preferences.
After all, Schoenle said: “Economics is an evolving science… economists don’t have a theory that says this is the target we need to aim for.”
Understanding preferences shows that people do not experience inflation in the same way, an important consideration for a central bank trying to keep the economy on a solid footing. Even the many measures of inflation vary because they look at different expenses.
“People with different incomes, as well as those who live in different locations, face very different rates of inflation due to the basket of goods they consume or the way they finance their purchases. This important variation is not well captured by our standard measures of average inflation,” wrote Stantcheva.
“This is also why it is so important not to jump to conclusions when comparing perceptions with reality – our measurements may not fully capture people’s reality and experiences.”
Janna Herron is a senior columnist at Yahoo Finance. Follow her on Twitter @JannaHerron.
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