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Business News/ Economy / Why Consumers Are Mad About Inflation Even Though It Has Fallen
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Why Consumers Are Mad About Inflation Even Though It Has Fallen

wsj

Prices are rising more slowly, but consumers fixate on how much lower they were before the pandemic, a problem for Biden.

Why Consumers Are Mad About Inflation Even Though It Has FallenPremium
Why Consumers Are Mad About Inflation Even Though It Has Fallen

Inflation has fallen sharply in the past year. The economy remains strong. Yet Americans remain deeply unhappy about the economy, often citing inflation. It continues to weigh on President Biden’s approval and re-election hopes.

What gives?

One big reason: While economists and the Federal Reserve focus on inflation, which is the rate of change in prices, Americans in their everyday lives usually focus on the absolute price of the things they need and want.

On that front, prices for many items, though rising more slowly this year than last, remain well above their levels just before or at the onset of the Covid-19 pandemic and aren’t likely to return to where they were.

Inflation as measured by the Labor Department’s consumer-price index was 3.7% in August compared with a year earlier, down sharply from the 9.1% recent peak in June 2022, thanks in part to a series of aggressive interest-rate hikes from the Fed.

Using the Fed’s preferred gauge—the price index of personal-consumption expenditures—the Commerce Department said Friday that inflation was 3.5% in August, a slight uptick from 3.4% in July. Core prices, which exclude volatile food and energy, rose just 0.1%, and 2.2% at an annual rate in the past three months, providing the Fed evidence of continued cooling of price pressures.

Despite easing inflation, consumer confidence is low. U.S. consumer sentiment in September fell slightly compared with August, as Americans’ assessment of current economic conditions retreated, a University of Michigan survey found.

Milk, gasoline still up $1 since before pandemic

Behind the dichotomy: For consumers, prices at the grocery store, gas station and car dealership are noticeably higher than in recent memory. A gallon of whole milk in August cost $3.93 on average in the U.S., according to the Labor Department. Though lower than earlier in 2023, it was still nearly $1, or 29%, more than in August 2019.

A gallon of regular unleaded gasoline cost $3.84 on average in August, according to data provider OPIS, 46% higher than the roughly $2.63 a gallon four years earlier.

While the average price of a new vehicle declined over the summer from earlier in the year, it was $45,516 in September, initial estimates from J.D. Power show, compared with $33,822 the same month in 2019.

“The fact that inflation has come down doesn’t mean prices have come down," said Tim Quinlan, senior economist at Wells Fargo. “For consumers, as long as prices remain elevated, which is what they are from their perspective, it still kind of weighs on confidence."

Joanne Hsu, director of the University of Michigan survey, said Americans are still adjusting to higher price levels after enjoying roughly a decade of low inflation leading up to the pandemic.

“Consumers understand that we’re not going back to 2019, but they’re still trying to figure out what this new normal looks like," Hsu said. “People are still trying to figure out, can their incomes keep pace with inflation or is inflation just going to keep eroding their living standards?"

Economists typically don’t view deflation, or outright declines in prices, as desirable for an economy, said Joe Brusuelas, chief economist at RSM. Still, consumers are “angry that the price level has reset higher on a permanent basis" for many items, he said.

Prices for some food items might fall back to near previous levels if they rose in response to a specific shock that resolves, said Jayson Lusk, dean of agricultural sciences at Oklahoma State University. For example, a dozen eggs jumped from about $1.93 in January 2022 to $4.82 in January 2023, reflecting an avian flu outbreak, but was down to $2.04 by August.

With labor costs up, prices aren’t likely to drop

Prices for groceries and dining out are likely to remain elevated for some time, Lusk said, as those industries deal with higher costs, such as workers’ pay. While wages are rising a bit more slowly in 2023 than 2022, in some industries, including leisure and hospitality, they continue to grow briskly as the demand for such workers remains high. And wages—unlike some prices, such as those for commodities—rarely ever go down.

“It is true that what happens on the farm affects food prices, but it generally is a small part of the overall cost of food," Lusk said. “The labor market continues to be tight and that’s putting pressure on prices."

Biden’s hopes for re-election next year rest in part on inflation fading as a concern. Yet the fall in inflation to date hasn’t helped him much. Roughly 63% of voters in a Wall Street Journal poll conducted at the end of August said they disapprove of Biden’s handling of inflation and nearly three in five said the U.S. economy has gotten worse over the last two years. That might reflect the failure of prices to actually decline, rather than simply rise more slowly.

Still, the downbeat mood hasn’t affected Americans’ willingness to spend, given plentiful jobs and low unemployment.

“That permanent shock to the price level has resulted in sour consumer sentiment. However, it does not exactly square with consumer behavior," said Brusuelas.

At Martin Chevrolet Buick GMC, a car dealership in Cleveland, Texas, demand is especially strong for vehicles with price tags in the high $20,000s because of their relative affordability, said President Janet Martin-Clark.

“We actually have waiting lists on these low-price vehicles because people want them because the prices have gone up so much," she said.

Martin-Clark said she doesn’t foresee that vehicle prices overall will go back near where they were before the pandemic, because supplies are still choppy. Another reason: She herself is dealing with higher costs of doing business, such as workers’ pay and insurance, that eat into the dealership’s profitability.

“I’m trying to think of one area where prices have eased and I can’t think of anything," Martin-Clark said.

Write to Amara Omeokwe at amara.omeokwe@wsj.com

Why Consumers Are Mad About Inflation Even Though It Has Fallen
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Why Consumers Are Mad About Inflation Even Though It Has Fallen
Why Consumers Are Mad About Inflation Even Though It Has Fallen
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Why Consumers Are Mad About Inflation Even Though It Has Fallen

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