Kate Bahn, Contributor
April 19, 2024
NEW YORK - AUGUST 14: People shop at a Fairway grocery store August 14, 2008 in the Brooklyn borough of New York City. A new government report has shown that U.S. inflation has risen to a 17-year-high annual rate in July, led by gains in energy, food, airline fares and apparel. Consumer prices rose by 0.8 per cent in July, which means that the cost of living in America is rising at a rate of 5.6 per cent over the year as a whole. (Photo by Spencer Platt/Getty Images)
Recent government inflation data found that prices have grown at 3.5% over the past year, down from a high of 9% in June 2022. While there has been significant cooling, the inflation rate is still high enough that Federal Reserve Chair Jerome Powell said earlier this week that an interest rate cut is likely not coming soon. Despite an otherwise robust recovery, inflation still ranks high on everyone’s list of economic concerns, and because of this, Americans overwhelmingly rank “strengthening the economy” as their top concern going into this year’s election, a Pew Research Center poll finds.
By and large, economists have not been sympathetic. This has been a truly remarkable economic recovery, with employment rebounding much faster than the Great Recession and wages growing, especially for low-wage workers, after decades of stagnation. This has led to a disconnect between economic commentators (frankly, such as myself) and people facing high costs for everyday necessities like groceries and basic care for their family. Ultimately, this is not just about convincing people the economy is actually good. Instead, this is a research question to take seriously: Why do people hate inflation and how can the answer inform the solution?
In new research by economist Stefanie Stantcheva, she updates seminal work from 1997 by Nobel laureate economist Robert Shiller on why people dislike inflation so much. The answer may seem obvious, because it is essentially the definition of inflation itself: purchasing power declines when inflation is high. Although there is evidence in jobs reports that wages have been rising faster than inflation, people typically do not recognize that increased incomes offset the impact of inflation.
In the high churn labor market, people attribute their wage gains to their own abilities and job choices rather than increases that are compensating for inflation. And while a National Bureau of Economic Research working paper shows wage gains have been the greatest for low-income people, low-income families also spend more of their incomes on their weekly budgets and are still hit hardest when grocery prices continue to increase. The United States Department of Agriculture found that those in the bottom 20% of the wage distribution spend nearly a third of their income on groceries, while those at the top 20% only spent 8%.
While everyone hates inflation, how we understand it depends a lot on who we are. Stantcheva’s research finds that partisanship is a huge factor – I probably don’t need to explicitly say which side of the spectrum says the cause is “Joe Biden” and which says “greed” is the primary cause.
People’s financial positions matter, too. While higher-income individuals are more likely think that monetary policy was too lax, with interest rates too low for too long, not surprisingly this was a much less likely to be stated as a reason for inflation among lower-income people who are more likely to benefit from an expansionary approach to monetary policy.
These perceptions extend to how people see the link between inflation and what will happen to their wages. Many people believe that inflation can increase business profits, while higher profits may not lead employers to increase worker wages to the same degree. Increasing research from the Groundwork Collaborative and others is backing up the fact that profits are driving inflation , and while wages are growing too, as of the most recent data in 2022, the share of economic growth going to labor incomes has been historically low , a separate NBER paper finds.
Understanding people’s attitudes toward inflation is critical to taking the harms seriously and crafting appropriate responses. Heading into a major election year, people working in business and economics need to take people’s attitudes toward inflation seriously. People are aware that basic costs, especially those like housing and caregiving , have been too high for too long, before inflation started increasing in 2021, which is what makes higher inflation feel unsustainable.
Despite variation across responses in Stantcheva’s new research, particularly along the income spectrum as well as the political divide, it’s clear that people sense the economy continues to be unfair and proactive government policy has a role to play. Next up will be for the federal government taking greed more seriously, in addition to addressing caregiving and housing crises, and for the Federal Reserve seriously considering who is actually helped and harmed as long as interest rates stay high. Hint: It's often the same lower-income people, who are also more likely to be Black families and women, the Chicago Booth Review notes. They are struggling to pay for groceries, housing, and care, since higher interest rates could raise the risk of their job loss for them, too, if they aren’t cut soon.
© 2024 Forbes Media LLC. All Rights Reserved
This Forbes article was legally licensed through AdvisorStream.
