When Jerome Powell presented a significant speech recently, he indicated that the inflation surge that affected the nation for three years had essentially been suppressed. Powell, the Federal Reserve chair, emphasized that the high-interest rates set by the Fed had effectively controlled inflation without causing an anticipated recession or high unemployment rates.
Despite the decline in inflation, most Americans are not particularly happy due to the high borrowing costs brought about by the Fed. Many individuals continue to express dissatisfaction as prices for essentials like food, gas, and housing remain significantly higher than pre-pandemic levels;
Vice President Kamala Harris is facing challenges in achieving public satisfaction regarding the Biden-Harris administration’s economic performance. A significant number of voters remain dissatisfied with the administration, particularly citing concerns about high prices despite the decrease in inflation and robust job growth.
The contrast in outlook between economists and policymakers on one side, and ordinary Americans on the other, regarding the economy over the past few years is evident. While economists and policymakers view the situation favorably, many Americans do not share the same sentiment.
At the annual economic conference in Jackson Hole, Powell highlighted the success of the Fed’s rate hikes in alleviating inflation without adversely impacting the economy, a commendable achievement known as a “soft landing.” The decline in inflation by 4-1/2 percentage points amid low unemployment was described by Powell as a welcome and rare outcome.
With inflation under control, the Federal Reserve is now considering reducing its key interest rate in September for the first time in over four years. The focus is shifting towards supporting the job market rather than combating inflation.
Even though economists consider the decline in inflation a success, households are still struggling with high prices and reduced wages. Many individuals perceive the goods they purchase to be considerably more expensive.
In the past, concerns were raised that continued rate hikes by the Fed could lead to economic downturns and extensive job losses. However, the current scenario paints a different picture, with inflation at 2.5%, close to the 2% target, and an unemployment rate of 4.3%.
While the Fed avoids declaring outright victory, there is a sense of satisfaction in defying doomsday predictions. Nevertheless, consumer sentiment reveals the lingering effects of three years of inflation woes on Americans.
A significant number of consumers continue to express worries about rising prices and inflation, with concerns about affordability of housing and high loan rates being predominant. The impact of the “inflation overhang,” where consumers take time to emotionally adjust to higher prices, is evident.
Economists and policymakers focus on managing inflation rather than price levels directly, anticipating that average wages will eventually catch up and enable consumers to cope with increased prices. However, the general public tends to view inflation negatively and may not perceive the intricacies of price control measures as economists do.
Reflecting on the post-COVID inflation surge, economists suggest reevaluation on how long high inflation should be tolerated and at what cost. Lessons are being drawn from the delay in addressing inflation spikes by central banks in the U.S. and the U.K.
While endeavoring to balance the control of inflation and economic growth, there is an ongoing debate on the acceptable level of unemployment or economic slowdown to curtail periods of high inflation.
