After a long period of gloom, Americans began to have a better outlook on inflation and the economy. This could sustain consumer spending, boost economic growth, and potentially affect President Joe Biden’s political fate.
The University of Michigan’s measure of consumer sentiment has jumped the most since 1991 in the past two months. A survey by the New York Fed found that Americans’ inflation expectations are at their lowest level in nearly three years. A New York Fed survey released last week showed that the percentage who expected their finances to improve in a year was the highest since June 2021.
Economists say this appears to be because consumers are reacting to a steady slowdown in inflation, rising incomes, falling gasoline prices, and rising stock markets. Inflation, which peaked at about 9% in June 2022, has fallen to 3.4%. According to the Fed’s preferred price indicator, the Fed’s annual 2% target has been reached in the past six months alone.
In addition, payroll growth has outpaced inflation over the past year, allowing Americans to adjust to the high cost of living. The government reported last week that workers’ median weekly income increased by 2.2% after adjusting for inflation last year. This is 2.5% higher than it was before the COVID-19 pandemic.
“It took some time for the drop in inflation to affect consumer sentiment, but the good news seems to be finally coming,” said Grace Zmer, analyst at Oxford Economics.
However, despite a steady slowdown in prices, prices are still up nearly 17 percent from three years ago. Although some individual products are becoming less expensive, overall prices are well above pre-COVID-19 levels.
In the run-up to the U.S. presidential election, inflation is falling, but the dual situation, where the cost of living is still high, is likely to raise important questions for voters, which of the two will have more impact on the presidential election?
Growing optimism about the economy may bolster President Joe Biden’s enthusiasm for the election, which has lagged behind in the polls. But Ryan Cummings, an economist who analyzed consumer confidence and how it is influenced by political views, warned that politics may limit how much public sentiment can improve.
Cummings said Americans’ economic outlook is increasingly driven by political partisanship rather than by the fundamental performance of the economy, adding, “As it becomes increasingly clear that the election will be a Trump-to-Biden showdown, Republicans may further escalate pessimism regardless of economic fundamentals, pushing back Americans’ sentiment.”
The question is whether Americans can afford the higher cost of living. “I can’t say that everyone can afford the higher cost of living, but as time goes by, more people are expected to say yes,” said Claudia Sham, a former Fed economist.
