Americans’ economic outlook brightens as inflation slows and wages outpace prices

WASHINGTON — After a long period of gloom, Americans are starting to feel better about inflation and the economy — a trend that could support consumer spending, fuel economic growth and potentially influence President Joe Biden’s political fortunes.

A measure of consumer confidence from the University of Michigan rose in the past two months by the most since 1991. A survey by the Federal Reserve Bank of New York showed U.S. inflation expectations at their lowest point in nearly three years. And the same survey, published last week, found that the percentage expecting their own finances to improve in a year’s time is at the highest level since June 2021.

Economists say consumers appear to be responding to slower inflation, higher incomes, lower gas prices and a rising stock market. Inflation has fallen from a peak of around 9% in June 2022 to 3.4%. According to the Federal Reserve’s favorite price gauge, inflation measured over the past six months has reached the Fed’s annual target of 2%.

Additionally, paychecks have risen faster than inflation over the past year, making it easier for Americans to adjust to the higher cost of living. Weekly earnings for the average worker – halfway between the highest and lowest earners – rose 2.2% last year after adjusting for inflation, the government reported last week. By that measure, inflation-adjusted wages are 2.5% higher than before the pandemic.

“While it took some time for falling inflation to filter through to consumer confidence, it appears the good news is finally sinking in,” said Grace Zwemmer, an analyst at Oxford Economics.

Even with the steady slowdown in inflation, prices are still nearly 17% higher than they were three years ago, a source of dissatisfaction for many Americans. While some individual goods become cheaper, overall prices are likely to remain well above pre-pandemic levels.

That dichotomy — a rapid decline in inflation with a still higher cost of living — is likely to raise a key question in the minds of voters, many of whom are still feeling the lingering financial and psychological fallout from the worst inflation in four years. decades. What will weigh more heavily in the presidential election: the dramatic drop in inflation or the fact that most prices are much higher than three years ago?

Consider the price of food, one of the things people most often encounter. Food inflation has plummeted from a year-on-year peak of 13.5% in August 2022 to just 1.3%. Yet a typical grocery basket still costs 20% more than it did in February 2021, just before inflation started to accelerate. On average, chicken prices have increased by 25%. This also applies to bread. Milk is 18% more expensive than before the pandemic.

The cost of renting an apartment has also skyrocketed and continues to rise faster than before the pandemic. Rental costs increased 6.5% from a year earlier, almost twice as high as before the pandemic. At their peak in early 2023, rents rose by almost 9% annually.

Sharply higher costs for necessities like food and rent continue to burden people like Romane Marshall, a 30-year-old software engineer living on the outskirts of Atlanta.

In late 2020, Marshall took computer coding classes to try to move beyond the warehouse and customer service jobs he had previously held. When he was hired by a professional services consulting firm in April 2021, he was “ecstatic.” After completing an internship program the following year, his salary increased from $50,000 to $60,000.

Yet his expenses also continued to rise. When he moved to a new apartment to be closer to work while his company transitioned from full-time remote work to a hybrid schedule, his rent doubled from the $700 he paid for a room at a friend’s house to $ 1,475 per month.

Marshall says his average grocery bill is now about $120 to $130, compared to just $70 to $80 three years ago. To keep his electricity costs low, he only occasionally turns on the heating in his apartment.

“There have been some positive changes, it’s just that things have gotten expensive,” he said. “The only thing that strikes me is that the price of food is still high.”

Some Americans now have a happier outlook. Hiring has remained solid and the unemployment rate has remained below 4% for almost two years, the longest stretch since the 1960s.

Dana Smith, a software developer, says she is optimistic the economy is improving. He and his wife have both received raises that have helped offset price spikes over the past three years.

Smith, 40, lives in Matthews, North Carolina, about a half hour from Charlotte, where he and his wife bought a house about three years ago. Since then, their value has risen by about 30%, increasing their household wealth.

“My perception,” he said, “is that the economy is getting better.”

The public’s growing optimism about the economy could signal renewed enthusiasm for Biden’s candidacy this year after weak polls defined much of his time in office. Yet Ryan Cummings, an economist who has analyzed consumer confidence and how it is affected by political views, warned that politics could limit the extent to which public sentiment can improve.

According to him, Americans’ economic prospects are increasingly determined by political partisanship rather than the underlying performance of the economy.

“As the election continues,” Cummings said, “and it becomes clearer that the 2024 race will be a Trump-Biden race, Republicans may increase their pessimism more than Democratic sentiment increases, sending sentiment back down regardless of economic fundamentals. .”

The University of Michigan survey found that consumer confidence among Democrats rose a sharp 11.8% in January, the second-largest increase ever. (The largest increase among Democrats occurred immediately after Biden’s 2020 presidential victory.)

Many Americans may still be in favor of the government taking steps not only to slow inflation, but also to try to lower overall prices to pre-pandemic levels. In a classic 1997 research paper, Nobel Prize-winning economist Robert Shiller found that two-thirds of respondents to a survey he conducted agreed that the government should try to reverse a 20% price spike.

However, economists unanimously warn that any attempt to do so would require a significant weakening of the economy, whether due to sharp interest rate hikes by the Fed or tax hikes. The likely consequence could be a recession that would cost millions of jobs.

David Andolfatto, an economist at the University of Miami and a former Fed economist, said it’s better if wages rise over time so people can adjust to higher prices.

“The cost of living is higher and wages are higher,” he said. ‘Let’s just move on. It is not necessary for (the government) to bring the price level down again. It would be too painful.”

Claudia Sahm, founder of Sahm Consulting and a former Fed economist, acknowledged that “people are angry” about higher prices.

“But then the next question is: can you afford it?” she asked. “Not everyone can say yes to that question. But over time, more and more people will be able to say yes.”

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AP writer Josh Bock contributed to this report from Washington.