Consumer Relief from Inflation: A Psychological Shift Towards Normalcy
The economic landscape is undergoing a significant transformation, with inflation rates exhibiting marked improvement compared to the steep increases witnessed over the past year. However, despite this progress, the lingering psychological impact of skyrocketing prices on consumers remains a pressing concern.
Inflation Rates: A Progressive Decline
Although inflation rates have cooled, they still exceed the Federal Reserve’s (Fed) preferred target. The Consumer Price Index (CPI) registered a 3.2% increase year-over-year in February, as reported by the Bureau of Labor Statistics, while the Personal Consumption Expenditures (PCE) price index recorded a 2.4% inflation rate in January. These figures are higher than the Fed’s desired level, underscoring the need for continued progress.
Comparatively, inflation rates have significantly decreased from their mid-2022 peaks when CPI recorded annual inflation rates of approximately 9%, and the PCE reading stood around 7%. These levels marked the highest recorded rates since the early 1980s, substantially surpassing pre-pandemic price increases. Nevertheless, we are inching closer to the Fed’s target, with The Conference Board projecting that PCE inflation rates will reach this milestone before the year’s end.
Price Stability: Gradual Progress and Persistent Challenges
Several price categories have already exhibited stabilization, with clothing and footwear costs registering a 0.1% increase year-over-year according to the PCE price index, and food and beverage prices rising by just 1.4%. Price increases for services are also showing signs of moderation, albeit more slowly due to labor shortages in this sector. Furthermore, rent prices, typically a stubborn component of inflation, are exhibiting promising trends. New rental price increases have been cooling as per various private sector data, and inflation data are starting to reflect this trend.
Consumer Skepticism: The Power of Memory
Despite the progress in reining in inflation, consumers remain skeptical due to their vivid recollection of pre-pandemic prices. Significant price increases include used cars, which are 34% more expensive; food prices, up by 26%; and rent prices, 22% higher than in January 2020. While not all price categories have experienced such drastic increases, the average basket of goods and services Americans purchase monthly is now 17% more expensive than just four years ago. This represents a substantially faster increase compared to the pre-pandemic period, during which it took over ten years for general price levels to rise by such an extent.
Memory and Adjustment: A Lengthy Process
Even when inflation rates reach the Fed’s 2% target, it may take several years for consumers to fully acclimate to the new price landscape. Inflation has declined, but prices have not, and consumers are primarily experiencing the latter.
A Silver Lining: Income Growth Amidst Price Increases
Despite the challenges posed by inflation, consumers have enjoyed a silver lining in the form of income growth outpacing price increases. According to Bureau of Labor Statistics data, average hourly earnings have risen by 22% since January 2020. Real wages, or wages adjusted for inflation, are up approximately 5% since the start of 2020. While this income growth has not entirely offset the daily price shocks consumers experience, it has helped keep US consumers financially stable during this transitional period.
Looking Forward: Balancing Price Increases and Income Growth
As both price increases and wage growth moderate, consumers will need to adapt to the evolving economic landscape. Real wages should continue growing faster than general prices, providing a crucial safety net for US consumers as they come to terms with the inflation surge that followed the pandemic. This gradual adjustment will be key in fostering renewed confidence and helping consumers fully recover from the economic challenges brought about by the pandemic.
