What economists miss about inflation

PHOTO: CHRISTOPHER DILTS/BLOOMBERG NEWS
PHOTO: CHRISTOPHER DILTS/BLOOMBERG NEWS

Summary

Prices aren’t rising as fast as they were in 2022, but consumers tend to have a long time horizon.

Many economists and political commentators wonder why U.S. consumers continue to feel they are suffering from inflation, although the annual rate of inflation dropped sharply during 2023 and is still well below its peak in the summer of 2022.

The answer is that consumers have a broader time horizon. They are looking at the rate of price increases over the past three years. From January 2021 to January 2024, the consumer price index for all items rose by 17.96%.

A concrete example: You paid $10 for a tuna sandwich at a takeout lunch place at the start of 2021. By the start of 2024, the same tuna sandwich cost $11.80. That certainly feels like severe inflation. It wouldn’t be much comfort if an economist told you that you should feel good because the price of the tuna sandwich rose by only 3.11% in the last year, from $11.45 to $11.80.

Moreover, in 2021 no one was asking for a tip. Since the pandemic, it has become common for payment screens at takeout places to prompt customers for a gratuity of as much as 25%. You can say no, but at the risk of a scowl from the cashier.

Economists might argue that consumers should be satisfied because their wages rose over those three years. But the rise in total wages was only 15.3% during this period, so workers are behind in real terms.

Further, at the beginning of the pandemic, many consumers of moderate or lower income received some type of government grant, such as refundable tax credits for children or unemployment checks that exceeded their prior take-home pay. These grants declined in 2022 and ran out after 2023.

In short, prices are up, wages aren’t keeping pace, and the tuna sandwich that used to cost $10 now costs $13 including a small tip. No wonder consumers feel they are still battling price inflation.

Mr. Pozen is a senior lecturer at the MIT Sloan School of Management and a former chairman of MFS Investment Management. Mr. Kothari is a professor of accounting and finance at MIT Sloan.

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