The Fed considers its fight against inflation a success. Will the public ultimately agree?

WASHINGTON– With the larger-than-usual cut in the key interest rate by half a percentage point last week, the US Federal Reserve underlined its belief that it has all but defeated inflation after three long years.

The general public? Not so much.

Consumer surveys, including one released Friday by The Associated Press-NORC Center for Public Affairs Research, show that most Americans remain dissatisfied with the economy, still reeling from an inflation rate that hit a four-decade high two years ago as the economy recovered from the pandemic-induced recession.

But some economists say the trend toward steadily lower lending rates could ultimately improve consumer sentiment. Inflation has been falling for more than two years and is almost back to the Fed's target of 2 percent. That means prices overall are still rising, but at a much slower rate.

The cost of some major consumer goods, from used cars to groceries, has actually fallen. Economic history teaches that a low, stable rate of inflation with only gradually rising prices eventually causes Americans to adjust to higher prices. One favorable factor is that average incomes are now rising faster than prices, allowing more households to afford necessities.

The issue remains a hot topic in the election campaign, with former President Donald Trump trying to capitalize on popular discontent and blaming the Biden-Harris administration's policies for the rise in inflation. But Friday's AP poll found that voters are now roughly divided on who they think would do a better job of handling the economy: Trump or Vice President Kamala Harris. Back in June, an AP poll found that six in 10 voters disapproved of President Joe Biden's economic record.

This is a sign that Americans' economic views are beginning to brighten, at least from a political perspective.

Little attention was paid to Fed Chairman Jerome Powell's assessment at a press conference on Wednesday that the Fed's preferred inflation indicator for August would be just 2.2% when the figures are released this week, a dramatic drop from the peak of 7% two years ago.

Powell also provided a colloquial definition of the Fed’s mandate to pursue “price stability.”

“A good definition of price stability,” he said, “is that people don't think about inflation in their day-to-day decisions. That's what everyone wants — back to the question: 'What is inflation?' Just keep inflation low and stable.”

Powell did not say the Fed had fully achieved that goal. While he acknowledged that consumers are still experiencing “high prices, not high inflation,” which he said was “painful,” he added, “I think we've made real progress.”

Sofia Baig, an economist at Morning Consult, found that Americans still see high prices as a financial burden. According to Morning Consult surveys, when most people think of inflation, they think of how much lower prices were two or four years ago. Fed officials and economists, on the other hand, tend to measure success in shorter time periods – prices compared to a year ago, six months ago or even a month ago.

Over time, Baig said, consumers tend to become accustomed to higher prices, especially as their incomes rise.

“You hear your grandparents talking about how ridiculously cheap a bottle of Coke is,” she said. “So inflation has always been there, but eventually you accept the new prices and get used to them.”

Some of the dire economic picture has likely been exacerbated by the political attacks Trump and his Republican allies have waged against the Biden-Harris administration for three years, with a relentless focus on inflation. Many economists have pointed out that high post-pandemic inflation was a global phenomenon, caused largely by shortages of parts and labor, and was as severe abroad as it was in the United States.

According to the University of Michigan's consumer sentiment survey, Democrats' economic forecast is now more positive than it was on the eve of the pandemic in February 2020. Sentiment among Republicans, on the other hand, has plummeted by almost two-thirds. Among independents, sentiment is still 40 percent below its pre-pandemic level.

Baig also cites the influence of social media, which is full of photos and videos of consumers pointing out the inflated prices, as one reason for Americans' dim view of the economy.

Although average prices are unlikely to return to pre-pandemic levels, lower inflation can speed up the adjustment process. Groceries still cost a lot more than they did three years ago, but they've only risen 0.9 percent over the past 12 months. The average price of a gallon of gasoline is down 17 percent from last year, to $3.22, according to AAA. It's below $3 in 14 states. The cost of a new lease has dropped 0.7 percent over the past year, figures from Apartment List show.

And in 2023, median household income rose 4% faster than prices, the first increase in inflation-adjusted income since the pandemic, the Census Bureau reported this month.

Some Americans actually see prices heading downward again. Tisha Deloney of Arlington, Virginia, says she was initially upset when her employer proposed a lower cost-of-living adjustment of about 3 percent this year. She remembers that back when inflation was at its peak, the adjustment was 8 percent. But when her rent went up two months ago, it was much less than in previous years.

“It felt more normal,” said Deloney, 38. “I definitely feel like inflation has gone down. It feels better.”

Some early signs suggest that other people may soon feel the same way. Consumer sentiment rose for the third month in a row in September, preliminary figures from the University of Michigan show. The more positive outlook is due to “cheaper prices from the consumer's perspective” for cars, appliances, furniture and other durable goods.

Since 2022, Morning Consult has been asking shoppers whether the cost of the goods and services they purchased was higher than expected. This figure has fallen compared to two years ago, a sign that many Americans are getting used to higher costs.

And while inflation remains people's top concern, according to polls, they now expect it to remain low in the coming years. The Michigan poll found that inflation expectations for the coming year fell for the fourth month in a row in September, to 2.7%. That was the lowest reading since December 2020 and in line with pre-pandemic levels.

On Friday, Christopher Waller, an outspoken member of the Fed's board, suggested in an interview with CNBC that there was even a risk that inflation could fall well below the central bank's 2 percent target in the coming months. Waller said that was a key reason he supported last week's half-percentage-point rate cut.

Waller pointed out that “core prices,” excluding fluctuating food and energy costs, have risen by just 1.8% year-on-year over the past four months.

If inflation continues to cool at its current pace, he could support further interest rate cuts of half a percentage point, Waller said.

“Inflation,” he said, “is coming down much faster than I thought.”