If economists are right about 2024, inflation will continue to fall and we won’t even be talking about it by the end of the year.
But the last three years have taught some valuable lessons about inflation that some of us never knew—and many others forgot, given that that last bout of serious price hikes was more than 40 years ago. The big overall takeaway is that inflation is not a relic of the past and can flare despite the modern magic of adept monetary policy.
Consumer attitudes about inflation are also important, because they affect behavior in ways that can loop back and make the economic damage worse.
As President Biden is learning, the psychology of inflation also has political costs. Biden’s approval rating sank as inflation was approaching its peak in 2022, and has never recovered, even though inflation has drastically improved since then.
While reporting on inflation for the past three years, I’ve had a lot of conversations with people who write to compliment my brilliant reporting or, more commonly, tell me I’m full of crap. These interactions, however [im]polite, provide valuable insights into how people perceive inflation: how they cope with it and how it affects their outlook on life.
Here are three insights in particular that have helped me understand inflation better:
Everybody has a personal inflation gauge. And it’s not the official inflation rate. This is one reason gasoline prices are so important, even though gas only accounts for about 3% of the typical family budget. Nearly everybody sees gas prices advertised in the billboard-sized numbers at every filling station, and if they start with a $4 or, God forbid, a $5, something seems wrong. Prices starting with a $3 aren’t so bad, but it’s better if they start with a $2. (California is a whole different universe.)
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High food prices, however, may be even more triggering than gas prices. One man wrote me to say Boar’s Head cold cuts that used to cost $10 per pound nowcost $14.99, and that’s why Biden has to go. Another wrote to complain that Pepperidge Farm rye bread had jumped from $3.79 per loaf to $4.99, calculating, correctly, that that’s a 32% inflation rate.
Victim of inflation? President Joe Biden in October. (Leah Millis/REUTERS) (Reuters / Reuters)
Cold cuts and rye bread are quixotic economic indicators, but they highlight a much bigger point: Excessive food inflation is a killer. In a November Yahoo Finance-Ipsos survey, we asked respondents what the single worst type of inflation is. Two-thirds cited food, while only 15% said gas and 12% said housing.
Year-over-year grocery inflation is down to 1.7%, which wouldn’t be a problem if not preceded by the big bout of inflation we just had. But annualized grocery inflation was in the double digits for 12 months in a row, starting in March 2022. Shoppers had a whole year to notice food prices soaring, and most of those prices have settled at new, higher levels. Compared with 2019 pre-COVID levels, food prices are up 25%, while incomes are only up 20%.
So, ouch.
There’s one other important personal inflation metric: rent. This doesn’t affect everybody, and even some renters are lucky enough to have locked in leases in ways that allow them to escape inflation. But many renters who have re-signed during the last couple of years have gotten hit with shocking rate increases, as landlords try to pass along the higher cost of utilities, maintenance, and borrowing — and maybe do a little price-gouging, too. Housing is such a big expense for most people that if your rent rises by more than your income, then inflation is out of control, even if gasoline is free.
The ”right” price is the lowest price in memory. When people start to think about prices, they tend to have some baseline number in mind that represents the right or the fair price for whatever they’re measuring. And the right price is often the lowest people can remember.
This comes up with gasoline prices all the time. People remember that during the Trump administration, gas prices were around $2.50 per gallon, and they even dipped below $2 during the COVID outbreak in 2020. So that’s where they should be now. “Gas in my neighborhood is $3.59,” one reader griped to me earlier this year. “Yes, it came down from the insane $5 per gallon, but it’s still high.”
Memories of cheap cold cuts may decide the presidential election — or will they? (Getty) (Elena Katkova via Getty Images)
Eh, not really. During the Trump administration, gas prices were unusually low because of overproduction relating to the fracking revolution. That overproduction ended in 2020, when oil and gasoline prices plunged and producers were basically subsidizing low consumer prices by booking enormous losses. Exxon Mobil lost a massive $22 billion that year, and dozens of smaller energy businesses went bust. Since then, energy firms have tightened capacity and focused on profit over market share, which is the main reason energy prices are higher now.
No matter. If gas prices were that low once, then they should be again, many people reason. It seems to be different with food prices, which don’t bounce around as much, and during normal times tend to creep up by a couple of percentage points per year, or barely enough to notice. There may be something about inflationary times, however, that fixates people on a past price and convinces them that is the way it should always be.
When inflation is high, it doesn’t matter what else the president does. I’ve debated Biden’s performance on the economy with many members of the Yahoo Finance audience. Sometimes I’ll point out that mostly everything is going well — except for inflation. Job growth has been record-breaking. Unemployment remains near record lows. Stocks have been booming. The Federal Reserve seems increasingly likely to pull off a “soft landing” in which inflation falls back to normal without a recession. On top of that, Biden has pushed and signed popular legislation boosting infrastructure, green energy, domestic production, and semiconductors.
Little of it registers. “People can’t eat Infrastructure,” one reader told me at the end of 2023. “They can’t fill up their gas tank with it either.” Biden’s approval rating seems to tell the same story. It’s at 39%, the lowest for any first-term president in modern history who’s running for reelection in 10 months. If the trend of 2023 holds throughout 2024, Biden may face this conundrum on Election Day: an inflation rate that seems numerically benign, yet vastly understates the anxiety rising prices have wrought.
Rick Newman is a senior columnist for Yahoo Finance. Follow him on Twitter at @rickjnewman.
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