Opinion: Here’s why the cost of inflation continues to hurt

Last week, Americans received more good news about the national economy. However, poor fiscal policies over the last several years make it difficult for many Americans to accept it.

They are not acting irrationally.

The problem with inflation is that, even when the rate falls back to optimal levels, it doesn’t erase the higher prices for groceries and other important items that confront consumers virtually every day.

Kevin Kliesen, business economist and research officer at the Federal Reserve Bank of St. Louis, told States Newsroom that consumers seem more negative about the economy now than before the pandemic. He blamed much of that on inflation.

“If you’re like me, you look at something, and you go, ‘Oh my gosh. I remember when it was so much less before the pandemic,’” he said. “So I think that calls into question, probably, a lot of people’s perceptions of the overall state of the economy and importantly their consumer finances.”

Indeed, a Deseret News/Hinckley poll in June found that a plurality of Utahns feel inflation will be the No. 1 issue influencing who they vote for as president in November.

As any older person who lived through the ‘70s will attest, prices won’t return to the levels that existed before inflation took off. Nor should people wish too hard for it. While various grocery items and gasoline prices may fluctuate and drop back to previous levels, a general deflationary economy would be destructive, with its downward pull on salaries and its negative effects on investments and loans.

However, it’s unfair to castigate the public for seemingly being out of step with data that shows a strong economy. Inflation hasn’t confined itself to groceries. Real estate and rents have escalated beyond what many can reasonably afford. Raw unemployment numbers don’t tell the story of those who are underemployed or whose salaries haven’t kept up with inflation. Many people have personal experiences that inform their opinions about the economy in general.

The lesson for politicians is to avoid policies that would fuel inflation. As Mark Kritzman, a senior lecturer at MIT Sloan, put it recently , the nation’s recent inflation problems were mainly due to government policies.

“Our research shows mathematically that the overwhelming driver of that burst of inflation in 2022 was federal spending, not the supply chain,” he said. That spending includes decisions made by both parties, extending at least back to the stimulus checks and other perks associated with pandemic relief legislation.

For the record, here are the latest figures: In its revised estimate of second-quarter GDP, the Commerce Department’s Bureau of Economic Analysis said the nation’s gross domestic product increased at a 3% annualized rate during the second quarter of 2024. That was higher than the initial 2.8% rate reported in July.

Also, the Commerce Department reported that inflation remained at a 2.5% annual rate in July, an increase of only 0.2% since June. The Federal Reserve’s target level for inflation is 2%, meaning the rate is coming close to an optimal level.

Meanwhile, the nation’s unemployment rate in July was 4.3%, according to the Bureau of Labor Statistics, while Utah’s rate was 3.2%. Typically, anything under 5% is considered full employment.

Federal Reserve Chairman Jerome Powell is expected to announce interest rate cuts in September, based on these robust figures.

Under different economic conditions, this would all be great news. And yet, based on recent history, we doubt these figures will have much effect on the dour and pessimistic way many Americans view the economy, nor on the way they intend to vote.

“Polling data,” as Princeton economist Alan S. Blinder wrote recently for The Wall Street Journal, “don’t obey the laws of arithmetic.”

Blinder, a former vice chairman of the Federal Reserve, cited a recent HarrisX poll for The Guardian that found 49% of Americans think unemployment was the worst it had been in 50 years, 72% believe inflation is getting worse and 56% think the economy is in a recession.

“Not one of these propositions is remotely true,” he wrote. The same is true of the result that showed 49% believing the S&P 500 stock market index is showing losses for the year. “Your brokerage statement will assure you otherwise.”

The Deseret News/Hinckley Institute poll in June showed much the same, with 48% of Utahns saying their own financial situation is getting worse, while just 19% said it’s improving.

That’s the reason governments should do all they can to avoid inflation. For consumers, it is a constant reminder of how things used to be better. It screams louder than any bland figures on GDP or future low inflation. Policies that lead to inflation trigger consequences that can take years of good news to reverse.