Inflation has soured Americans’ feelings about the state of the economy.
(Left) Kevin Dietsch, (Right) Michael Nagle/Xinhua, via Getty Images
Americans continue to be unhappy with the economy despite many strong data points.One popular explanation, inflation, has fallen in recent months.But wages still haven’t fully caught up to the price surges of recent years.
Unemployment in the US remains near a record low, economists say the country has a good chance of avoiding a recession, and a popular metric of US job satisfaction reached its highest level in decades last year.
But if you ask Americans, the economy is in pretty bad shape.
In an August Quinnipiac survey of more than 1,800 US adults, 71% described the US economy as not so good or poor — 51% said they thought the economy was getting worse. Many other surveys have reflected a similar sentiment, fueling a discussion in economic circles about what could be driving the apparent disconnect.
In June 2022, the University of Michigan’s consumer-sentiment index, which is used to estimate future spending and saving, hit its lowest level since regular data collection began in the 1970s. Many of the index’s respondents linked their pessimism to inflation, and despite an uptick in recent months, sentiment remains well below pre-pandemic levels.
But if inflation is the winning explanation, why do Americans still hate the economy? Inflation has fallen from over 9% last summer to 3.7% in August, and inflation-adjusted wages are less of a problem now as well. In May, year-over-year wage growth outpaced inflation for the first time in two years, and it continues to do so.
One potential explanation: While these inflation-cooling developments have reduced recession fears in the US, they’ve provided only limited relief for American consumers so far.
That’s because the big price spikes of the past few years haven’t gone anywhere. While prices are rising slower than they were a year ago, they’re rising from already-high levels. And while wages are now increasing faster than inflation, they’re still playing catch-up.
In 2022, the median inflation-adjusted household income fell $1,750, per the Census Bureau. Since the beginning of 2021, US prices have risen about 16% compared with 13% growth in wages, according to a Bankrate analysis of Bureau of Labor Statistics data released prior to September’s inflation report.
Sarah Foster, a Bankrate analyst, told Insider she looked at wages and inflation as two runners in a race. When the economy began emerging from the coronavirus pandemic in 2021, she said, inflation sprinted ahead — taking a big lead over wage growth — but the gap has narrowed over the past year.
“Inflation doesn’t have as much momentum anymore, and, since May, wages are now running at a faster speed than inflation,” she said. “But because of how much ground wages lost in the race, they’re not yet taking the lead.”
Inflation, however, or specifically the gap between inflation and wage growth, is far from the only explanation that has been proposed for Americans’ apparent pessimism about the economy.
Some experts have pointed to the rise in political partisanship, which could be souring Republicans’ assessment of the economy. Others have pointed to surveys that suggest most Americans are actually quite satisfied with their individual economic situations but change their tune when they’re asked about the national economy — why this might be happening is a whole other debate.
If the inflation-wage gap is souring Americans’ view on the economy, this factor could persist for a while longer.
Bankrate projects that wages won’t catch up to inflation until the fourth quarter of 2024, but any progress could be good news for President Joe Biden’s reelection chances. An August Wall Street Journal survey found 59% of Americans disapproved of the job he’s doing on the economy.
Foster said that to close the wage-inflation gap next year, the optimistic economic trends of recent months would have to persist.
“The likelihood of Americans fully recovering their purchasing power depends on whether the economy can continue staging this impressive performance and stand strong against these massive headwinds,” she said. “If a recession were to begin at some point next year, joblessness would likely rise, weighing on inflation but wage growth as well.”