The Fed sees its inflation fight as a success. Will the public eventually agree?

WASHINGTON — With its larger than usual half point cut The Federal Reserve stressed last week that it is confident it has all but conquered inflation after three long years.

The general public? Not so much.

Consumer research, including a released friday Most Americans remain dissatisfied with the economy, according to figures from The Associated Press-NORC Center for Public Affairs Research. They’re still struggling with inflation that hit a 40-year high two years ago as the economy recovered from the pandemic-induced recession.

Still, the shift to ever-lower lending rates could eventually boost consumer confidence, some economists say. Inflation has been falling for more than two years and is nearly back to the Fed’s 2% target. While that means prices are still rising overall, they are doing so much more slowly.

The cost of a number of high-profile consumer goods, from used cars to grocery prices, has actually fallen. Economic history suggests that a low, steady rate of inflation, with prices rising only gradually, eventually leads Americans to adjust to higher price levels. One favorable factor is that average incomes are now rising faster than pricesallowing more households to afford basic necessities.

The issue remains a hot potato in the political campaign. Seeking to capitalize on public discontent, former President Donald Trump blamed the Biden-Harris administration’s policies for the spike in inflation. Yet Friday’s AP poll found voters are now broadly divided over who they think would better handle the economy, Trump or Vice President Kamala Harris. In June, an AP poll had found that six in 10 disapproved of President Joe Biden’s economic policies.

That’s a sign that Americans’ economic outlook, at least from a political standpoint, has become more positive.

Little noticed in a press conference Chairman Jerome Powell gave on Wednesday was his estimate that the Fed’s preferred inflation gauge would read just 2.2% for August when the figure is released this week. That would be a dramatic drop from the peak of 7% two years ago.

Powell also provided an informal definition of the Fed’s mandate to seek “price stability.”

“A good definition of price stability,” he said, “is that people don’t think about inflation in their day-to-day decisions. That’s where everybody wants to be — back to ‘What is inflation?’ Just keep it low, keep it stable.”

Powell stopped short of suggesting the Fed had fully achieved that goal. He acknowledged that consumers were still experiencing “high prices, as opposed to high inflation,” which he called “painful.” But, he added, “I think we’ve made real progress.”

Sofia Baig, an economist at polling firm Morning Consult, noted that Americans still see high prices as a financial burden. According to Morning Consult SurveysShe said when most people think about inflation, they think about how much lower prices were two or four years ago. Fed officials and economists, by contrast, typically measure success over shorter time frames — prices compared to a year ago, six months ago, even a month ago.

According to Baig, consumers generally get used to higher prices, especially as their incomes rise.

“You hear your grandparents talking about a bottle of Coke that costs ridiculously little,” she said. “So inflation has always been there, but at some point you accept the new prices and you get used to it.”

Some of the economic gloom has likely been exacerbated by the three-year political attacks that Trump and his Republican allies have waged against the Biden-Harris administration, which has relentlessly targeted inflation. Many economists have noted that high inflation was a global phenomenon in the wake of the pandemic, driven largely by shortages of parts and labor, and as severe abroad as it was in the United States.

According to the University of Michigan consumer sentiment researchDemocrats’ outlook on the economy is more positive now than it was on the eve of the pandemic in February 2020. By contrast, sentiment among Republicans has fallen by nearly two-thirds. Among independents, sentiment is still 40% below pre-pandemic levels.

Baig also cites the influence of social media, which is filled with photos and videos of consumers pointing out exorbitant prices, as a factor in Americans’ negative perception of the economy.

While average prices are unlikely to return to where they were before the pandemic, lower inflation could help speed the adjustment process. Groceries still cost much more than they did three years ago, but they’ve only risen 0.9% over the past 12 months. The average cost of a gallon of gasoline has fallen 17% from a year ago, to $3.22, according to AAAIn 14 states it is under $3. The cost of a new lease has fallen 0.7% over the past year, Apartment List figures show.

And in 2023, median household income rose 4% faster than prices, the first increase in inflation-adjusted income since the pandemic, the Census Bureau said. reported this month.

Some Americans are seeing prices stabilize. Tisha Deloney of Arlington, Virginia, said she was initially irritated when her company offered a smaller cost-of-living adjustment for this year of about 3%, down from the 8% she remembers when inflation peaked. But when her rent went up two months ago, it rose by a much smaller amount than in previous years.

“It felt more normal,” said Deloney, 38. “I definitely feel like inflation has come down. It feels better.”

Some early signs suggest other people may soon feel the same way. Consumer confidence rose for the third straight month in September, according to preliminary figures from the University of MichiganThe improved outlook was driven by “more favorable prices as perceived by consumers” for autos, appliances, furniture and other durable goods.

Since 2022, Morning Consult has surveyed shoppers on whether the cost of goods and services they’ve purchased is more expensive than they expected. That metric has fallen from two years ago, a sign that many Americans are adjusting to higher costs.

And while people continue to cite inflation as a top concern, they now expect it to remain low for years to come, according to surveys. The Michigan survey found that expectations for one-year inflation fell for the fourth straight month in September, to 2.7%. That was the lowest reading since December 2020 and consistent with pre-pandemic levels.

On Friday, Christopher Waller, an outspoken member of the Fed’s board of governors, suggested in an interview with CNBC that there is even a risk that inflation will fall well below the central bank’s 2% target in the coming months. According to Waller, that is a key reason why he supported last week’s half-percentage-point rate cut.

Waller noted that excluding volatile food and energy costs, “core” prices rose just 1.8% year-on-year over the past four months.

If inflation continues to cool at its current pace, Waller said he could support further rate cuts of half a percentage point.

“Inflation,” he said, “is coming down much faster than I thought.”