Americans aren’t happy with the economy. Around three-quarters of respondents to a recent Wall Street Journal poll said that they believed inflation had moved “in the wrong direction” over the last year. Similarly, the University of Michigan consumer sentiment index showed in early May that Americans feel their economic standing has declined through the first half of 2024.

These findings arrive despite inflation being lower than a year ago and well below its recent peak of 9 percent in 2022. Lower doesn’t mean solved, though. Inflation remains above the Federal Reserve Bank’s 2 percent target, and Americans continue to grapple with its effects. According to the University of Michigan index, they expect inflation to run at 3.5 percent for years to come.

These pessimistic attitudes about inflation persist for several reasons. First, inflation for widely used services is still elevated. Higher interest rates also have raised borrowing costs. Finally, inflation has affected real wages.

Restaurant and service inflation are still high, up 4.1 percent and 5.3 percent respectively over the past year, according to April’s CPI summary. City Journal contributing editor Allison Schrager attributes these high prices to rising labor costs, which will only keep going up. Dining out (and other services, such as ride-sharing and mobile delivery) have become commonplace in many American households, regardless of income level. Americans will “feel poorer because the things they enjoy cost more,” Schrager observes.

The current higher interest-rate environment—the federal funds rate still sits above 5 percent—also has a real impact on consumers, as it drives up the cost of debt payments. Economists don’t often consider borrowing costs as part of the cost of living, excluding interest payments from the CPI. But for many Americans, borrowing is integral. Recent research from former Treasury secretary Lawrence Summers and coauthors demonstrates that consumer sentiment and borrowing costs are highly correlated. According to Summers’s team, concerns over borrowing costs are at levels not seen since the early 1980s, when Fed chairman Paul Volcker’s shock therapy pushed interest rates above 15 percent.

In this higher rate environment, Americans are struggling with elevated interest rates on big-ticket items, such as homes and cars. Summers and his coauthors show that these factors have contributed to the tripling of interest payments on  new 30-year mortgages since 2021. Car payments have risen more than 80 percent since the beginning of the pandemic. Gina Keeb and Kailyn Rhone rightly note that even a change in rates by a few percentage points can increase interest mortgage payments by hundreds of thousands of dollars over a loan’s lifecycle. Maintenance costs are up, too.

Inflation has degraded the real value of American wages. When incomes don’t rise with prices, inflation becomes an expensive issue for consumers. The Employment Cost Index (ECI), which considers compensation data across various industries, reflects that real wages have shrunk about 3.7 percent since 2020. As Manhattan Institute fellow Stephen Miran notes, real wages measured by the ECI (as of fall 2023) have retreated to 2015 levels. This reverses nearly nine years of real wage growth.

Some glass-half-full types like economics writer Joseph Politano argue that average and median real wages are rising. But median wage measurements exclude important information about spending on employee benefits, which likely leads to an overstated wage metric. Politano admits that average real-wage measurements suffer from an “aggregation” issue; they miss the nuances of industries and individual workers.

Wage growth has been strongest among lower-wage workers, mostly driven by job-switching. As Parker Sheppard has written, lower-wage workers also pay a higher “inflation tax.” The assets they possess (largely cash) don’t gain value because of inflation, unlike the assets of those at higher income levels.

In a country where inflation for in-demand services remains high, borrowing is getting more expensive, and real wage growth is questionable, a negative public outlook on inflation makes sense. A relative decrease in the CPI does not mean that inflation is somehow significantly less burdensome than it was last year. It’s hard for Americans to believe that a prevalent economic indicator is moving in the right direction when they feel that so much else is not.

Photo by Justin Sullivan/Getty Images


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