Mar 29, 2024 - Economy

Getting over high inflation is going to take some time

Illustration of a person holding a really tiny dollar bill.

Illustration: Allie Carl/Axios

Getting over high inflation looks to take even longer than, say, recovering from a romantic breakup.

Why it matters: That's one conclusion to be teased out from a new study, presented at the Brookings Institution Thursday, and helps explain why the national mood about the economy is still fairly grim, even as inflation has fallen over the past year.

Zoom in: For her research, economist Stefanie Stantcheva conducted two surveys of Americans to explore a familiar question: Why do people dislike inflation?

The intrigue: The surveys took place in December 2023 and January 2024, when inflation was about 3% — about half as high as the year before.

  • The median survey respondent, however, believed inflation was 5% — and when asked said they didn't think the rate would fall in the coming year.
  • 80% of respondents said prices systematically increase faster than wages. But the data show that last year, average wage growth outpaced inflation.

What they're saying: "One view of economists is that after enough time has passed, wages will adjust to prices and ultimately things will be equivalent," Stantcheva said in an interview with Brookings.

  • But most of us humans perceive these gains very slowly. People "very much think that wages grow much more slowly than prices."

The big picture: The key thing consumers notice is that prices are much higher than in 2020 — and still rising, albeit at a much slower pace, as Axios' Neil Irwin has written about.

  • Price levels are not inflation, but most people think of these two things together.

Zoom out: Economists and others have been puzzling over the disconnect between economic reality and the public's perceptions about the economy for years at this point.

  • A paper from prominent economists published last month suggested high borrowing costs — which are not factored into inflation data —  help explain it.

Reality check: It's not clear how long it'll take for people to get used to higher prices. There are some recent signs that consumer sentiment is turning around — though still well below pre-pandemic levels.

The bottom line: Regular people don't think about inflation the way economists do — and economists will continue to puzzle this out for a long time.

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