Please don’t call inflation anxiety delusional

Many commentators are struck by the disconnect between the US economy’s impressive performance of late and the dismal popular view of the very same economy. Explanations usually blame mistakes or misperceptions – caused by post-Covid stress, or partisan politics, or social-media paranoia, or ignorance in failing to notice for instance that earnings have been rising faster than prices.

There’s something to all of that, no doubt. Yet for millions of Americans, complaints about worsening economic conditions are grounded not in misperception but in hard reality – and the refusal to acknowledge this only adds insult to injury.

At first sight, the gap between the mood of the nation and economic facts on the ground is jarring. Despite recovering a bit from its pandemic lows, the University of Michigan’s index of consumer sentiment still stands at levels normally associated with recessions. For low-income and higher-income households alike, it slumped in the first year of the pandemic, recovered a little, then slumped again. Low-income households, especially, remain about as bleak on the economy as they were during the crash of 2008.

Yet, according to what I read, most every economic measure is telling them to rejoice. The unemployment rate is less than 4 per cent. The recession widely predicted for the second half of this year hasn’t happened: Output grew at a breathless 4.9 per cent annual rate in the third quarter. Inflation has fallen from its peak of more than 9 per cent in the summer of 2022 to 3.7 per cent and is still trending downward. Firms must compete for workers. Inflation-adjusted wages are higher than before the pandemic. Consumers are spending like crazy. Median household net worth – a measure not distorted by fortunes of the very rich – has surged, thanks to accumulated retirement savings and growing home equity.

How can people be so gloomy? By all means give some weight to the standard explanations. The pandemic was traumatic and this might still be clouding people’s judgment. Thanks to America’s broken politics, assessments of the economy and everything else are pulled to and fro by partisan loyalties: If your team is in charge, things are fine; if it isn’t, it all just goes from bad to worse. Social media thrives on rage and amplifies discontent. And people do sometimes misjudge their inflation-adjusted incomes, preoccupied with the level of prices (“sticker shock”) not their rate of change relative to earnings.

It’s likely, moreover, that if inflation keeps falling and the Federal Reserve achieves its sought-after desired “soft landing,” the mood will improve, and the apparent gap between sentiment and the facts will narrow.

Yet these explanations nonetheless make light of the brutal realities of financial insecurity – a condition affecting millions of households, and by no means confined to the poorest.

Earlier this year economists at the Federal Reserve Bank of Dallas took aim at the frequently expressed view that, thanks to strong growth in their wages, lower-income families have been hurt less by high inflation than higher-income families. Not so, they pointed out. Low-income households spend more of their income on essentials such as gas, food and rent, which have had higher-than-average inflation rates. Also, when prices go up, higher-income households can just spend less on luxuries and switch to cheaper brands. Lower-income households weren’t shopping at Whole Foods to begin with. They had no such margin to cut.

Americans with steady jobs and good employers, who own their homes and can afford to save prudently, are also somewhat hedged against unexpectedly higher prices. They’re confident their wages will rise if inflation does. They benefit from house-price appreciation, and many doubtless locked in low mortgage rates when the opportunity arose. Aside from room to trim discretionary spending, they have various financial buffers against inflation and other bad economic news. If they have some of their emergency savings in bank deposits, those balances are now earning interest.

But many households aren’t so fortunate. Their rent has gone up. If their financial buffer is an envelope of cash, its value is still falling fast. Any emergency spending might end up on credit cards charging punitive rates of interest. If they must replace a car, say, their debt burden becomes unmanageable. If they’re insecurely employed, they’ll be less confident that future wages will keep pace with prices – and, with all the talk about possible hard landings, less confident about hanging on to their jobs.

Averages can mislead in other ways. Consider the retired. The less prosperous among that group rely heavily or entirely on Social Security – with payments rising in line with inflation (subject to the caveat about differing inflation rates). The many who rely as well on retirement savings aren’t fully shielded from higher prices. Much of their additional income may be fixed in nominal terms – perhaps in the form of an annuity without inflation protection or (following standard investment advice) interest from prudently purchased “safe” government bonds. For people in this position, a temporary rise in inflation induces a permanent fall in real disposable income.

Different aspects of insecurity compound each other. They’re intersectional, as one might say, and asymmetrically distributed. The financially secure might not be unduly worried about inflation – but the financially insecure have good reason to be frightened.

A recent survey by the American Communities Project makes clear that different segments of the population perceive risks in radically different ways. Nonetheless, the survey found that inflation ranked at or close to the top among “issues facing your community” and “issues facing the country as a whole” across all the categories it examined. That’s people in big cities, in suburbs, in exurbs, in the “African American South,” in “Working Class Country,” in “Graying America” and more.

Is this a case of extraordinary popular delusions and the madness of crowds – or a measure of the extent of financial insecurity? Inflation anxiety shouldn’t be dismissed, much less explained away by experts who believe they know better. People dealing with financial stress have a lot to worry about. They need inflation to be low enough to ignore. At the moment, it isn’t.