Despite significant improvements in various economic indicators, many Americans remain sceptical about their financial well-being. Here’s why even though inflation is easing, the average consumer still feels the pinch.
The Current Economic Snapshot
On the surface, the economic news seems positive:
- Stock Market Rebound: The S&P 500 index is up 58% from pre-pandemic levels.
- Increased Household Wealth: Total household wealth is nearly 40% higher.
- Low Unemployment: The unemployment rate stands at a historically low 4.3%.
- Rising Wages: Average wage growth has consistently outpaced consumer price increases, enhancing purchasing power compared to pre-pandemic levels.
Given these indicators, Americans should feel more financially secure. But many are still feeling uneasy. Why?
The Persistent Shadow of Inflation
Even though inflation has cooled from a peak of 9.1% in mid-2022 to 3% in June, many Americans remain preoccupied with the cumulative price increases they’ve experienced since the start of the pandemic. Essentials like food and gas have seen dramatic price hikes, and recent data shows that consumers have become increasingly price-sensitive as their pandemic-era savings diminish.
“The mere fact that (prices) are not going up anymore is not appeasing consumers,” explained Scott Hoyt, an economist at Moody’s Analytics. “They want to see them drop but that’s not happening.”
Why Consumer Confidence Matters
Consumer confidence is a critical economic indicator because:
- Spending Drives the Economy: Consumer spending accounts for 70% of economic activity. Though spending growth has slowed, it remains robust.
- Political Implications: Consumer perceptions of inflation could impact political figures like Vice President Kamala Harris, affecting her race against Donald Trump.
Current Inflation Rates and Trends
Here’s a snapshot of current inflation data:
- Annual Inflation: Down to 3% from a high of 9.1%.
- July CPI Report: Expected to show inflation held steady at 3%, with core inflation slightly lower at 3.2%.
Despite these figures, consumer confidence remains below pre-pandemic levels. Dana Peterson, Chief Economist of the Conference Board, notes that while consumers are positive about the labour market, concerns about high prices and interest rates persist.
The Impact of Historical Price Increases
Although inflation overall has moderated, consumers are still grappling with the effects of past price increases:
- Long-Term Price Hikes: Aggregate retail prices are up 17.4% over the past five years, compared to a 2.6% rise in the previous five-year period.
- Essential Goods: Prices for essentials like gas (up 29%) and groceries (up 24%) have soared, while discretionary items like electronics have decreased in price.
Scott Hoyt points out that while some prices have dropped, like those for appliances and electronics, this doesn’t ease the frustration of higher costs for everyday necessities.
Real Stories of Inflation Impact
Consider Lynn Gottlieb from Seattle, who has had to adapt her spending habits significantly:
- Dining Out: Reduced from weekly restaurant visits to occasional takeout.
- Travel: Cut out regular flights due to soaring airline fares.
- Property Taxes and Insurance: Increased expenses have kept her on a tight budget.
Gottlieb’s experience illustrates how, despite some cost stability, other rising expenses continue to strain her finances.
Consumer Behaviour and Spending Patterns
Recent data from Bank of America highlights a shift in consumer spending:
- Reduced Dollar Value: Spending by dollar value was down 0.4% in July, even though transaction volumes were up 1%.
- Trading Down: Consumers are shifting from premium to discount retailers and opting for generic brands.
This behaviour reflects a growing trend of “trading down,” where consumers opt for cheaper alternatives to stretch their dollars further.
The Decline in Pandemic Savings
The surge in savings during the pandemic is dwindling:
- Savings Decline: Bank deposits are 23% below their 2021 peak but still 40% above pre-pandemic levels.
- Federal Reserve Data: The Federal Reserve Bank of San Francisco reports that much of the $2 trillion saved during the pandemic has been spent.
As these savings deplete, consumers, particularly younger generations, are more conscious of their spending and continue to seek ways to save money.
Conclusion
Despite recent improvements in inflation and economic indicators, many Americans still feel financially strained due to lingering effects of past price increases and the depletion of pandemic-era savings. As consumer confidence remains subdued, understanding these dynamics is crucial for businesses and policymakers aiming to address ongoing economic concerns.
Relevant Links:
- Bank of America: Click here
- Moody’s Analytics: Click here
- Consumer Price Index Data: Click here
- Federal Reserve Data: Click here
- Conference Board Consumer Confidence Index: Click here
