2024-04-04 23:30:00
In the latest Wall Street Journal poll of U.S. election battleground states, 74% of respondents said inflation had moved in the wrong direction over the past year.
That judgment, echoed by respondents in all seven states, is surprising and alarming — but simply not true. I’m not stating a point. This is not something on which reasonable people would disagree. If hard economic data is any indication, we can say unequivocally that inflation has moved in the right direction over the last year.
In the 12 months to February, U.S. inflation was 3.2%, according to the century-old Consumer Price Index (CPI), compared with 6% a year earlier. You would get similar results even if you used a slightly different time span, or a slightly different measure (such as the Fed’s preference index). Excluding food and energy, or looking only at food and energy, inflation still fell.
Yes, some people are facing higher inflation (like people buying houses), but for the average person, inflation is down.
Yet ordinary people think inflation is rising.
When it comes to economic matters, feelings contradict facts and feelings are taking over. This is obviously bad news for US President Joe Biden’s re-election hopes. He cannot tell voters outright that they are wrong, without being accused of not understanding the sentiments of the people if he does. And that probably won’t change anything. This feeling seems to reflect an overall pessimism disconnected from the data.
It’s easy to blame this on misunderstanding. Falling inflation means that price levels are still rising, just at a slower pace than before. People sometimes confuse inflation with the price level and assume that inflation is getting worse because the price level is rising (it is rare for prices to fall).
A recent study from the Brookings Institution, written by Harvard economist Stefanie Stantcheva, reveals how people actually think and feel about inflation. The study found that half of the respondents correctly defined inflation as an increase in prices. The other half of respondents had an incorrect definition of inflation, citing statements such as “price gouging” or “everything is too expensive.” Therefore, some people may confuse high prices with high inflation. But is this enough to explain our findings? not necessarily.
Moreover, the gap between perception and reality goes far beyond inflation, which strongly suggests that the reason lies not in choice of words, either.
Over the past year, the stock market has hit record highs, home prices have remained stable or increased, and interest rates on deposits have increased, but more respondents to a Wall Street Journal survey believe their investments or retirement savings are headed in the wrong direction. , the ratio is 47% to 41%.
Mutual fund giant Vanguard’s client retirement accounts grew an average of 19% last year. Granted, this won’t make up for the 20% drop in 2022, especially after adjusting for inflation. But this does not mean that the general direction is falling rather than rising.
More respondents believe that in the past two years, the economic situation has not gotten better but has gotten worse, with a ratio of more than 2:1 (56% vs. 25%). Given strong job growth, unemployment near its lowest level in half a century, and gross domestic product (GDP) growth (which actually accelerated last year), this perception is not in line with the facts.
As the saying goes, GDP cannot be eaten as food. But food is also a part of GDP, and while people have been saying for several years that they are spending less on groceries and eating out, data shows that after adjusting for inflation, Americans overall spent more on groceries and restaurant meals than in 2019 increased year on year.
It is true that inflation and shortages will be serious from 2021 to early 2023, and improvements in data since then may not be enough to erase those bad memories. However, there is evidence that people do notice that things are getting better around them. For example, a University of Michigan survey found that consumer confidence has risen.
Additionally, while a much larger share of respondents said the national economy was in poor shape, nearly as many more said their state’s economy was good.
This is reminiscent of how voters tend to give Congress low marks but give their own representatives high marks. But the definition of a good Congress depends largely on your political affiliation, while the definition of a good economy should have some objectivity. With the exception of a few central bankers, who doesn’t want unemployment to fall? And swing state economies have largely kept pace with the national economy.
All of which suggests that negative perceptions around inflation and the economy are intertwined with deeper pessimism about the country—what I’ve previously called “referred pain.”
Stantcheva’s research shows that inflation can evoke broader feelings of unfairness. People tend to think that prices are rising faster than wages, that companies raise prices because they can, that they don’t give employees raises because they don’t have to, that the rich can always handle inflation better. (This is sometimes the case, but not necessarily in the long run).
Stantcheva told me that inflation obviously creates bad feelings, and bad feelings about the country or the economy may make people view inflation more pessimistically. For example, her research has found that economists associate lower unemployment with higher inflation, and the public believes that weak growth, high unemployment, and high inflation go hand in hand. As one respondent to the survey said: “To me, the economy is not just hurt by high inflation, but it is too difficult to be optimistic.”
So if views on inflation are a function of broader pessimism, where does this pessimism come from?
A common culprit is the media. A recent Nature study of online news found that for every negative word in a headline, click-through rates increased by 2.3%. This negative bias is not new: According to research, it was true for unemployment in the 1990s, and it is also true for the COVID-19 pandemic in 2020. (Social media, even more so, is called doomsday shopping for a reason.) A recent Brookings analysis by Ben Harris and Aaron Sojourner showed that the negative bias toward economic news has intensified in recent years.
But negative media coverage does not necessarily lead to public pessimism; it may simply be related to it. Stantcheva’s research found that while people get information about inflation from a variety of media, they mainly rely on their own feelings. People will consume media that confirms their biases, and media tends to show consumers what they want to see, especially social media with precise algorithms.
The media and public are pessimistic for the same reason: they are worried about the United States. Changing this situation will require more than just lowering inflation.
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