Americans hate inflation.
It's an aversion that colors their perception of economics and personal finances. And even if the Fed were to hit its previously elusive 2% inflation target, it would not be enough to assuage most people's aversion to it.
In fact, if it were up to them, Americans would choose no inflation at all.
These findings come from two recent studies that examined how Americans feel about inflation, whether that sentiment is likely to change, and what policymakers should make about that sentiment. This is one of the results.
What's the biggest complaint people have about inflation? How it's squeezing living standards and forcing Americans to adjust their budgets by buying smaller quantities or lower-quality goods.
Stephanie Stancheva, an author of one of the studies and a professor of political economy at Harvard University, said, “It's especially important to understand how people feel about their illness.” The university wrote to Yahoo Finance.
Case in point: A record percentage of Americans say inflation remains their top economic concern, according to a recent Gallup poll. This weighs on confidence despite strong job growth since the start of 2021 and an unemployment rate that has remained below 4% for 27 consecutive months.
read more: Inflation slows in April – what this means for your wallet
“Deep-rooted recognition”
The topic still generates as much backlash today as it did nearly 30 years ago.
It was then that eminent economist Robert Shiller set out to understand why consumers dislike inflation so much. Stancheva's research shows that what he discovered still resonates with Americans today, asking many of the same questions that Schiller posed.
Three-quarters of respondents in Stancheva's survey believe their purchasing power is being eroded by inflation, about the same as the 77% who said the same in Shiller's 1996 survey. Additionally, a recent survey found that 80% of respondents believe that prices exceed wages. Since February 2020, hourly wage growth has outpaced inflation.
read more: How does the labor market affect inflation?
Americans also reject any positive aspects associated with inflation, with 70% in Stancheva's survey saying “inflation is a sign of bad economic health,” echoing Shiller's findings. The same is true.
“It is interesting that despite all the changes the U.S. economy has seen since then, the core reasons and sentiments remain very similar to those of the mid-1990s,” Stancheva wrote. “This suggests that these are deep-seated perceptions, beliefs and attitudes that are perhaps less sensitive to current events.”
“The main points of this project”
So what is the ideal inflation rate for Americans? A second recent study reveals just that, revealing a wide gap between what consumers want and the Fed's goals.
On average, Americans prefer an annual inflation rate of 0.20%, which is well below the central bank's 2% target and far from the current rate of inflation (3.4% last month).
“That's the core of this project,” said Rafael Schoenl, one of the researchers on the second study and a professor of economics at Brandeis University. “Few people want more than the Fed's perceived goals.”
Demographic and socio-economic characteristics are the strongest predictors of people's desired inflation rates, the study found. For example, older people and people who earn their income primarily from wages prefer lower inflation, while people with more assets prefer higher inflation on average.
Economic reasons also play a role, albeit on a smaller scale.
The researchers tested this by presenting study participants with one of five economic theories. Two reasons for rising inflation and three reasons for falling inflation.
Participants were then asked again about their desired inflation rate and which of the five inflation theories contributed to their hope.
Although several theories drove participants' desired inflation rates, only one had a statistically significant effect on inflation preferences. That is, wages do not keep up with inflation, reducing purchasing power.
After being exposed to the wage inflation theory, respondents' desired inflation rate was 1 percentage point lower than all other theories.
“If you want to know one takeaway from this before you do any further research; [it] “If we want people to agree to higher inflation, we may need to allay fears that inflation will erode wages,” Schoenl said, “because when treated with this idea, people “This will make them even more hesitant about rising inflation.”
“Capturing people's reality”
The gulf between the rate of inflation Americans think is acceptable and the rate the Federal Reserve prefers complicates that effort, at least in the court of public opinion.
Although the 2% target is a widely accepted standard among central banks around the world, researchers in both studies argue that it is important for policymakers to consider consumer preferences.
After all, Schönl said, “economics is an evolving science…There is no theory among economists that says this is the goal we should achieve.”
Understanding preferences shows that people do not experience inflation in the same way, an important consideration for central banks seeking to keep the economy on solid footing. Even many measures of inflation are different because they look at different spending.
“People with different incomes and who live in different places face very different rates of inflation depending on the basket of goods they consume and how they finance their purchases. average measures do not capture it well,” Stancheva wrote.
“This is also why it's so important not to jump to conclusions when comparing perception to reality. Our measures may not capture people's reality or experience at all.”
Janna Herron is a senior columnist at Yahoo Finance. Follow her on Twitter @JannaHerron.
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