The Fed sees its fight against inflation as a success. Will the public eventually agree?

WASHINGTON – With its recent half-percentage point cut in interest rates, the Federal Reserve underscored its belief that it has all but overcome inflation after three long years.

The general public? Not so much.

Recent consumer surveys, including one released by the Associated Press-NORC Center for Public Affairs Research, show that most Americans remain dissatisfied with the economy and are still suffering from inflation that was as high as two years ago when the economy was recovering. The pandemic recession reached a four-decade high.

But some economists say the shift toward steadily lower borrowing rates could ultimately improve consumer sentiment. Inflation has fallen for more than two years and is almost back below the Fed's 2 percent target. This means that prices are still rising overall, but at a much slower rate.

The cost of some high-profile consumer goods, from used cars to grocery prices, has actually fallen. Economic history suggests that a low, stable rate of inflation with prices rising only gradually will eventually lead Americans to adjust to higher price levels. One positive factor is that average incomes are now rising faster than prices, meaning more households can afford essentials.

The issue remains controversial in the political election campaign. Capitalizing on public discontent, former President Donald Trump blamed the Biden-Harris administration's policies for the rise in inflation. But the AP poll found that voters are now largely divided over who they think would handle the economy better: Trump or Vice President Kamala Harris. Back in June, an AP poll found that six out of 10 respondents disapproved of President Joe Biden's economic record.

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

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 where everyone wants to be – back to “What is inflation?” Just keep it low and stable.”

Powell did not suggest that the Fed had fully achieved that goal. He acknowledged that consumers are still experiencing “high prices versus high inflation,” which he said is “painful.” But he added: “I think we’ve made real progress.”

Sofia Baig, an economist at pollster Morning Consult, noted that Americans still view high prices as a financial burden. When people think about inflation, they probably think about how much lower prices were two or four years ago. By contrast, Fed officials and economists typically measure success in shorter time frames – prices compared to a year ago, six months ago, or even a month ago.

Over time, Baig said, consumers typically become accustomed to higher prices, especially as their income catches up.

“You hear your grandparents talking about how a bottle of Coke costs extremely little,” she said. “So inflation has always existed, but at a certain point you accept the new prices and get used to them.”

Some of the gloom surrounding the economy has likely been heightened by the political attacks that Trump and his Republican allies have waged for three years against the Biden-Harris administration, which has relentlessly focused on inflation. Many economists have noted that high inflation following the pandemic recession was a global phenomenon, driven largely by shortages of parts and labor, and was as severe abroad as it was in the United States. Inflation worsened the following year after Russia's invasion of Ukraine sent food, oil and gas prices soaring.

According to the University of Michigan Consumer Sentiment Survey, Democrats' outlook for the economy is now more positive than it was on the eve of the pandemic in February 2020. Meanwhile, sentiment among Republicans has fallen by almost two-thirds. Among independents, sentiment is still 40% below pre-pandemic levels.

Neale Mahoney, an economist at Stanford University, said his research shows that the impact on consumer sentiment caused by a rise in inflation diminishes by about 50% each year. Still, Mahoney noted that the influence of politics has increased this election cycle.

“We are witnessing a tug-of-war between fading inflation fears and heated partisanship leading up to the election,” said Mahoney, who was a Biden White House adviser from 2022 to 2023.

Baig also cites the influence of social media, which is replete with photos and videos of consumers pointing out inflated prices, which has the effect of clouding Americans' view of the economy.

Although average prices are unlikely to return to pre-pandemic levels, slower inflation can help speed up the adjustment process. Groceries still cost a lot more than they did three years ago, but in the last 12 months they have only increased by 0.9%. According to AAA, the average cost of a gallon of gasoline fell 17% from last year to $3.22. In 14 states it is less than $3. The cost of a new rental contract fell by 0.7% last 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 expect prices to stabilize. Tisha Deloney of Arlington, Virginia, said she was initially upset when her company projected a smaller cost-of-living adjustment of about 3% this year, compared to the 8% she remembers when inflation peaked. But when her rent went up two months ago, the increase was significantly less than in previous years.

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

Since 2022, Morning Consult has been surveying buyers about whether the cost of the goods and services they purchased was higher than expected. That figure is down from two years ago, a sign that many Americans are preparing for higher costs.

And while surveys show people continue to cite inflation as the biggest problem, they now expect it to remain low in the coming years. The Michigan survey showed one-year inflation expectations fell for the fourth straight month in September to 2.7%. This was the lowest such value since December 2020.

Christopher Waller, an outspoken member of the Fed's board of directors, suggested in a recent interview on CNBC that there is even a risk that inflation could fall well below the central bank's 2 percent target in the coming months – a key reason Waller said he supported cutting interest rates by half a percentage point last week.

Waller noted that, excluding fluctuating food and energy costs, “core prices” have risen just 1.8% per year over the past four months.

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

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