You aren’t buying a Friday pizza dinner for your family today at the same price you were in 2019. Or even 2022. Prices are up, and they’re staying up. At City Journal, Reade Ben explains that “lower doesn’t mean solved” when it comes to inflation. He writes:
Americans aren’t happy with the economy. Around three-quarters of respondents to a recent Wall Street Journal pollsaid that they believed inflation had moved “in the wrong direction” over the last year. Similarly, the University of Michigan consumer sentiment index showed in early May that Americans feel their economic standing has declined through the first half of 2024.
These findings arrive despite inflation being lower than a year ago and well below its recent peak of 9 percent in 2022. Lower doesn’t mean solved, though. Inflation remains above the Federal Reserve Bank’s 2 percent target, and Americans continue to grapple with its effects. According to the University of Michigan index, they expect inflation to run at 3.5 percent for years to come.
These pessimistic attitudes about inflation persist for several reasons. First, inflation for widely used services is still elevated. Higher interest rates also have raised borrowing costs. Finally, inflation has affected real wages.
Restaurant and service inflation are still high, up 4.1 percent and 5.3 percent respectively over the past year, according to April’s CPI summary. City Journal contributing editor Allison Schrager attributes these high prices to rising labor costs, which will only keep going up. Dining out (and other services, such as ride-sharing and mobile delivery) have become commonplace in many American households, regardless of income level. Americans will “feel poorer because the things they enjoy cost more,” Schrager observes.
The current higher interest-rate environment—the federal funds rate still sits above 5 percent—also has a real impact on consumers, as it drives up the cost of debt payments. Economists don’t often consider borrowing costs as part of the cost of living, excluding interest payments from the CPI. But for many Americans, borrowing is integral. Recent research from former Treasury secretary Lawrence Summers and coauthors demonstrates that consumer sentiment and borrowing costs are highly correlated. According to Summers’s team, concerns over borrowing costs are at levels not seen since the early 1980s, when Fed chairman Paul Volcker’s shock therapy pushed interest rates above 15 percent.
In this higher rate environment, Americans are struggling with elevated interest rates on big-ticket items, such as homes and cars. Summers and his coauthors show that these factors have contributed to the tripling of interest payments on new 30-year mortgages since 2021. Car payments have risen more than 80 percent since the beginning of the pandemic. Gina Keeb and Kailyn Rhone rightly note that even a change in rates by a few percentage points can increase interest mortgage payments by hundreds of thousands of dollars over a loan’s lifecycle. Maintenance costs are up, too.
Inflation has degraded the real value of American wages. When incomes don’t rise with prices, inflation becomes an expensive issue for consumers. The Employment Cost Index (ECI), which considers compensation data across various industries, reflects that real wages have shrunk about 3.7 percent since 2020. As Manhattan Institute fellow Stephen Miran notes, real wages measured by the ECI (as of fall 2023) have retreated to 2015 levels. This reverses nearly nine years of real wage growth.
Action Line: Take a look at my chart below of the CPI index for food and beverages. Even if prices are rising slower than they were, they’re still way above where they had been. The reversal in real wage growth during the Biden era has hurt American families. Click here to subscribe to my free monthly Survive & Thrive letter.
