How inflation is still crushing consumers

Inflation is improving, which is obviously good news. The annual rate of inflation peaked at 9% last June. It’s now at 4.9%. The year-over-year change in the cost of food, appliances, energy and cars is coming down.

Consumers are unlikely to be cheery about that, however. By some measures, consumer confidence is at recessionary levels, despite a growing economy and record-low unemployment. The same gloom shows up in President Biden’s approval ratings, which are mired in the low-40-percent range. Biden talks repeatedly about unprecedented job growth since he took office in 2021, but it doesn’t move the needle. Voters aren’t buying it.

A deeper dive into the effects of inflation during the entire Biden presidency helps explain the prevailing malaise. Economists pay attention to rate of price changes, which tells whether inflation is getting better or worse. In the real world, however, consumers have to deal with the cumulative effect of rising prices. And those trends are generally terrible, with no sign of a reversal.

When Biden took office in January 2021, inflation was just 1.4%. Nobody was worried about it. Six months later, however, inflation hit 5.2%, well above the Federal Reserve’s 2% target. We know now that several forces conspired to push prices up: Supply chains snarled by Covid, a massive shift in consumer spending toward goods, tight energy markets and trillions in federal stimulus money Congress flooded into the economy.

The chart below shows the two-year change in the cost of essential things Americans need to buy. This captures basically all of the post-Covid inflationary spurt, and coincides with most of Biden’s presidency. Overall inflation has been 13.6% during the last two years. The cost of housing, which takes the biggest chunk of the family budget, is up 14.4%. Energy is up 23.7%, transportation is up 20.2% and food is up 17.8%. Incomes, meanwhile, have risen just 10.5% during the same period of time.

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Put it all together, and incomes have risen about 3 percentage points less than inflation during the last two years. That’s de facto evidence that Americans, on average, are falling behind. And it’s happening in ways that are visible and painful to ordinary people: Rent, groceries, transportation and utility bills are taking a bigger bite out of the typical paycheck.

A few things are getting more affordable. The cost of health care, appliances, and clothing has risen by less than incomes during the last two years. Electronics have actually gotten cheaper, which is the usual trend. But these are relatively small spending categories.

Earnings don’t normally lag inflation. Since 1980, real hourly earnings, or earnings adjusted for inflation, have been slightly positive, on average. Consumers haven’t made huge gains, but they haven’t fallen behind, either. The last two years have represented a very unwelcome setback.

A declining rate of inflation, or “disinflation,” is underway, which means the annualized rate of inflation is coming down. But costs for consumers are still going up. The 4.9% inflation rate in April was the lowest in nearly two years. But for consumers, that’s a smaller rise in prices tacked onto a bigger rise in prices from the prior months. If the inflation rate dropped to 0%—which everybody would celebrate—consumers would still be paying 14% more than two years ago. Past inflation is basically locked in, unless prices drop.

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There’s little chance of deflation, or falling prices, anytime soon. Most economists forecast inflation in the 3% to 4% range into 2024. There’s unlikely to be a big drop in housing costs, mainly because there’s just not enough housing. Automakers still aren’t making as many cars as they were before the Covid pandemic, keeping those supplies tight, too. And producers have an obvious incentive to keep prices high for as long as they can.

A year from now, President Biden might be able to brag about inflation that’s back into the normal range. The Fed may be satisfied that the rapid interest-rate hikes of the last year did their job, slowing the economy enough to get inflation into the comfort zone.

But that will be on top of the inflation that’s already occurred and is unlikely to reverse. Consumers will only catch up when wage growth outpaces inflation for an extended period of time—a year or two, at a minimum.

So by the time voters make up their minds in the 2024 election, inflation might look good, on paper. Budgets, however, will still be recovering.

Rick Newman is a senior columnist for Yahoo Finance. Follow him on Twitter at @rickjnewman

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