The Fed considers its fight against inflation a success. Will public opinion finally accept it?

WASHINGTON — With its larger than usual size half-point cut In announcing its key interest rate last week, the Federal Reserve underscored its belief that it had virtually conquered inflation after three long years.

The general public? Not really.

Consumer surveys, including a released on friday Most Americans remain unhappy with the economy, still battered by an inflation rate that hit a four-decade high two years ago as the economy rebounded from the pandemic recession, according to The Associated Press Center for Public Affairs Research-NORC.

Still, some economists say the gradual decline in interest rates could eventually boost consumer sentiment. Inflation has been falling for more than two years and is almost back to the Fed’s 2% target. That means prices are still rising, but at a much slower pace.

The costs of some high-value consumer goods, from used cars to grocery prices, have actually fallen. Economic history suggests that a low and stable inflation rate, with prices rising only gradually, eventually leads Americans to adjust to higher price levels. One positive factor is that average incomes are now increases faster than pricesenabling more households to obtain basic necessities.

The issue remains a hot button on the campaign trail. Seeking to capitalize on public discontent, former President Donald Trump blamed the Biden-Harris administration’s policies for rising inflation. Yet an AP poll on Friday found that voters are now split over who they think would be better suited to manage the economy, Trump or Vice President Kamala Harris. Last June, an AP poll found that six in 10 disapproved of President Joe Biden’s economic record.

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

Little was noted at Fed Chairman Jerome Powell’s press conference Wednesday that he estimated that the Fed’s preferred inflation gauge would come in at just 2.2% for August, when the figure is released this week. That would be a sharp decline from a peak of 7% two years ago.

Powell also provided a familiar definition of the Fed’s mandate to seek “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 everybody wants to get to: ‘What is inflation?’ Just keep it low, keep it stable.”

Powell stopped short of suggesting the Fed had fully achieved that goal. He acknowledged that consumers were still experiencing “high prices, as opposed to high inflation,” which he said was “painful.” But, he added, “I think we’ve made real progress.”

Sofia Baig, an economist at polling firm Morning Consult, noted that Americans still view high prices as a financial burden. Morning Consult Surveys“When most people think of inflation, they think of the decline in prices two or four years ago. Fed officials and economists, by contrast, typically measure success in the short run—prices compared to a year ago, six months ago, or even a month ago.”

Over time, Baig said, consumers typically adjust to higher prices, especially as their incomes rise.

“We often hear our grandparents talk about a bottle of Coke costing a ridiculous price,” she explains. “Inflation has always existed, but at a certain point, you get used to the new prices.”

The gloom surrounding the economy has likely been compounded by the political attacks that Trump and his Republican allies have waged over the past three years against the Biden-Harris administration, relentlessly focused on inflation. Many economists have noted that high inflation is a global phenomenon after the pandemic, driven largely by shortages of parts and labor, and that it is just as bad abroad as it is in the United States.

According to the University of Michigan Consumer sentiment surveyDemocrats have a more positive view of the economy than they did on the eve of the pandemic in February 2020. In contrast, Republican sentiment has fallen by nearly two-thirds. Among independents, sentiment is still 40% below its pre-pandemic level.

Baig also cites the influence of social media, which is filled with photos and videos of consumers pointing out exorbitant prices, in tarnishing Americans’ view of the economy.

While average prices are unlikely to return to pre-pandemic levels, slower inflation can help speed the adjustment process. Groceries are still much more expensive than they were three years ago, but over the past 12 months, they’ve only increased by 0.9%. The average cost of a gallon of gasoline has fallen 17% from a year ago, to $3.22. according to AAAIn 14 states, it is less than $3. The cost of a new rental lease has fallen 0.7% over the past year, The apartment list figures show.

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

Some Americans are seeing prices level off. Tisha Deloney of Arlington, Virginia, said she was initially upset when her employer gave her a lower cost-of-living adjustment for this year, about 3%, compared with the 8% she remembers when inflation peaked. But when her rent went up two months ago, it went up by a much smaller amount than in previous years.

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

There are early signs that others may soon feel the same way. Consumer sentiment rose in September for a third straight month, according to preliminary figures from the ratings agency. University of MichiganThe brighter outlook is due to “more favorable consumer perceptions of prices” for cars, appliances, furniture and other durable goods.

Since 2022, Morning Consult has been surveying consumers about whether the prices of goods and services they purchased were higher than expected. That metric has fallen from two years ago, a sign that many Americans are adjusting to higher costs.

And while people continue to cite inflation as a major concern, surveys show they now expect it to remain low in the years ahead. The Michigan survey found that inflation expectations one year from now fell in September for the fourth straight month to 2.7%. That’s the lowest reading since December 2020 and in line with pre-pandemic levels.

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

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

If inflation continues to slow at its current pace, Waller said, he could support additional half-point rate cuts.

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