U.S. consumers can\u2019t seem to shake the feeling that their dollars don\u2019t go as far as they used to.\u00a0<\/p>\n
Wages are outpacing inflation. The economy is growing. Investors are pre-emptively celebrating the end of the Federal Reserve\u2019s interest-rate hikes. But consumers are still in a rotten mood \u2014 and most are placing the blame on high prices.\u00a0<\/p>\n
\n
Consumers expect inflation to speed up over the next year, according to the University of Michigan\u2019s most recent measure of consumer sentiment \u2014 even though the rate of inflation actually slowed throughout 2023, from 6.4% at the start of the year to 3.2% in October.<\/p>\n
It\u2019s a disconnect that has puzzled experts: How can consumers be so pessimistic in the face of such good economic data? Or to put it another way, if the economy is doing so well, why do Americans still feel so bad?\u00a0<\/p>\n
One economist has her own theory.\u00a0<\/p>\n
\u201cPeople anchor to their recent experiences, and they anchor to individual numbers,\u201d said Constance Hunter, a senior adviser at Macro Policy Perspectives, LLC, an economic research firm. \u201cThat\u2019s altering perceptions.\u201d<\/p>\n
According to Hunter\u2019s hypothesis, consumers\u2019 perceptions of inflation are shaped by two factors: first, that the cost of individual segments of their own budgets has shot up over the last few years, and second, that most people are still using the prepandemic economy as a comparison point.\u00a0<\/p>\n
It\u2019s difficult to say with absolute certainty what\u2019s driving discontent among consumers. But Hunter suspects these biases serve as \u201canchors\u201d for economic perceptions, shaping people\u2019s outlook even when the data offers an alternative picture.<\/p>\n
\u201cIt\u2019s probably not conscious,\u201d she noted.\u00a0<\/p>\n
Breaking down the disconnect<\/h2>\n
Hunter posits that people\u2019s perceptions of inflation hinge partially on singular instances of sticker shock that have an outsize impact on their broader economic outlook.\u00a0<\/p>\n
That\u2019s especially true for nonnegotiable expenses, Hunter said.<\/p>\n
Take car insurance, for example. The price of coverage has seen a cumulative increase of 33% since February 2020, about an 8% annualized increase.\u00a0<\/p>\n
\u201cYou have to have insurance to drive a car,\u201d Hunter said. \u201cIf you don\u2019t know why [the price] has gone up so much, and you\u2019re not sure if it\u2019s going to go up next year, then of course you\u2019re going to be worried about inflation.\u201d\u00a0<\/p>\n
Americans also may still be wincing at inflation because they\u2019re comparing current prices or their current wages to a prepandemic standard that has since shifted drastically, Hunter said.\u00a0<\/p>\n
\u201cPeople are anchoring to before the pandemic, because it kind of froze time, in a way,\u201d she said.<\/p>\n
The money illusion\u00a0<\/h2>\n
Hunter\u2019s thinking connects back to an economic theory first posed in the early 20th century that states that most people don\u2019t take into account the effects of inflation when evaluating their own wealth.\u00a0<\/p>\n
The theory, called the money illusion, states that people tend to view their income in nominal rather than real terms.<\/p>\n
For example, someone may receive a 2% wage increase during a year in which prices also increase 2%. That person may perceive themselves as having more money to spend, despite the fact that in real terms, their purchasing power stayed the same.<\/p>\n
\u201cWe\u2019re all subject to it,\u201d Hunter said.<\/p>\n
That phenomenon can also work in the other direction \u2014 and that\u2019s what may have happened over the last few years, as prices shot up while wages initially lagged.<\/p>\n
Does it matter?\u00a0<\/h2>\n
So Americans are gloomy about the state of the economy. But does that actually matter in the broad scheme of things \u2014 especially when it comes to monetary policy?\u00a0<\/p>\n
Not really, Hunter said.\u00a0<\/p>\n
\u201dWhat will matter to the Fed is what the data actually prints, not what people are anchored to,\u201d she said.\u00a0<\/p>\n
It\u2019s an old economic adage: Pay attention to what consumers do, rather than what they say. And recent data indicates they\u2019re still spending \u2014 and likely planning to spend through the holidays \u2014 at decent levels.\u00a0<\/p>\n
Consumers\u2019 economic pessimism may prove to be more of a political problem. President Joe Biden will likely have to confront questions on the campaign trail this year about whether his Bidenomics policy agenda has left voters feeling better off.\u00a0<\/p>\n
But such sentiment is often split along party lines, Hunter noted.\u00a0<\/p>\n
\u201cDuring the Trump years, Democrats had significantly worse sentiment, then Biden gets elected and it\u2019s exactly reversed,\u201d she said. \u201cIf it weren\u2019t [inflation], it would be something else causing the political bifurcation.\u201d\u00a0\u00a0<\/p>\n
How long might it take until consumers finally start feeling less pessimistic about higher prices?\u00a0 Hunter estimates it will be six months to a year.\u00a0<\/p>\n
\u201cI think when you\u2019re talking about people\u2019s experiences and what they\u2019re anchoring to, it\u2019s going to take time,\u201d she said. \u201cThey need to feel it.\u201d\u00a0<\/p>\n<\/p><\/div>\n
Read the full article here<\/a><\/p>\n","protected":false},"excerpt":{"rendered":"U.S. consumers can\u2019t seem to shake the feeling that their dollars don\u2019t go as far as they used to.\u00a0 Wages are outpacing inflation. The economy is growing. Investors are pre-emptively celebrating the end of the Federal Reserve\u2019s interest-rate hikes. But consumers are still in a rotten mood \u2014 and most are placing the blame on high prices.\u00a0 Consumers expect inflation to speed up over the next year, according to the University of Michigan\u2019s most recent measure of consumer sentiment \u2014 even though the rate of inflation actually slowed throughout 2023, from 6.4% at the start of the year to 3.2%<\/p>\n","protected":false},"author":1,"featured_media":11265,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[37],"tags":[],"class_list":["post-11264","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-finance"],"yoast_head":"\n
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