Washington – In a highly-anticipated speech last month, Federal Reserve Chair Jerome Powell made a bold statement: the inflation surge that had been plaguing the nation for the past three years was now essentially defeated.
What’s more impressive is that the Fed’s high interest rates managed to achieve this feat without causing a widely predicted recession or high unemployment. While this news should be cause for celebration, the majority of Americans are still feeling the effects of elevated prices for necessities like food, gas, and housing.
This disconnect between the positive economic outlook of policymakers and the discontent of the public presents a challenge for Vice President Kamala Harris as she seeks to succeed President Joe Biden. Despite the decline in inflation and strong job growth, many voters express dissatisfaction with the economic record of the Biden-Harris administration, especially when it comes to high prices.
This disparity highlights a significant gap between the views of economists and policymakers and those of ordinary Americans.
In his speech at the annual economic symposium in Jackson Hole, Wyoming, Powell emphasized how the Fed’s sharp rate hikes were more successful than most economists had predicted in taming inflation without damaging the economy. This is no small feat, as achieving a “soft landing” – where inflation is controlled without causing a recession – is notoriously difficult.
“Some argued that getting inflation under control would require a recession and a lengthy period of high unemployment,” Powell said. “Yet the decline in inflation from its peak two years ago has occurred in a context of low unemployment – a welcome and historically unusual result.”
The Fed’s success in bringing down inflation has led them to prepare to cut their key interest rates for the first time in more than four years this September. Their focus is now shifting to sustaining the job market with lower interest rates rather than continuing to combat inflation.
However, despite the Fed’s success in conquering inflation, many consumers are still preoccupied with the current high price levels.
“From the viewpoint of economists and central bankers, this has been a remarkable success – how inflation went up, came back down, and is now around the target,” said Kristin Forbes, an economist at MIT and former official at the Bank of England. “But from the viewpoint of households, it has not been as successful. Many have taken a big hit to their wages, and the basket of goods they buy has become much more expensive.”
This disconnect between the views of economists and ordinary Americans can be attributed to several factors. One is that the Fed’s policies are aimed at managing inflation – the rate of price changes – rather than the actual price levels themselves. So even though inflation may have spiked, the Fed’s goal is to bring it back to a sustainable level of 2%, rather than reversing the price increases. They expect wages to eventually catch up, allowing consumers to afford the higher prices.
“Central bankers believe that even if inflation goes above 2% for a while, as long as it comes back, it’s fine,” Forbes explained. “But the amount of time inflation stays above 2% can have a significant cost.”
Research by Harvard economist Stefanie Stantcheva and her colleagues found that most people’s understanding of inflation is different from that of economists. Economists tend to view inflation as a consequence of strong economic growth, and they describe it as a result of an “overheating” economy. This means that low unemployment, strong job growth, and rising wages can cause businesses to raise prices without losing sales.
On the other hand, Stantcheva’s survey found that ordinary Americans view inflation as an unambiguously bad thing and rarely see it as a sign of a healthy economy or a byproduct of positive developments. They believe that inflation is caused by excessive government spending or greedy businesses, and they do not understand the trade-offs that policymakers face in controlling inflation.
This misunderstanding may also explain why many consumers were not concerned about the potential for a downturn as a result of the Fed’s rate hikes. In fact, one survey found that many people believed the economy was in a recession because inflation was so high.
At the Jackson Hole conference, Andrew Bailey, governor of the Bank of England, argued that central banks cannot guarantee that inflation will never appear – they can only try to bring it back down when it does.
“I get this question quite often in Parliament,” Bailey said. “People say, ‘You have failed to control inflation.’ But this is not true.”
He went on to say that the test of a central bank is not to prevent
