Inflation is receding and the labor market is as healthy as it has been since the 1950s. Wages are higher in inflation-adjusted terms. Everyone who wants a job either has one or can find one quickly.
Consumers, who by most measures are in healthy financial shape, have a dim view of the overall economy even though they themselves are doing just fine.
And with the economy growing at healthy rate over the past year, one would think that Americans would be celebrating a boom.
Yet in September, a poll by Sawyer Business School ahd USA Today found that 70% of Americans believed the economy was getting worse, not better.
Why are consumers so unhappy? To begin with, it depends on their point of comparison.
If one compares today’s economy to 2019, before the pandemic, the view is bound to be negative. Since 2019, the economy has endured a pandemic, a shutdown in global supply chains, price shocks on the oil and commodity markets and global turmoil.
But if one compares today’s economy to a year ago, then the view is bound to be positive given the strong labor market, easing inflation and overall growth.
In addition, there is also a sense that consumers, who by most measures are in healthy financial shape, have a dim view of the overall economy even though they themselves are doing just fine.
As the saying goes, “It’s a recession for thee, not for me.”
As the saying goes, “It’s a recession for thee, not for me.”
The same disconnect applies to businesses. Our own fourth quarter RSM US Middle Market Business Index showed a similar concern for the economy overall even as executives in the survey had a positive outlook for their own businesses.
Underneath this outlook is the disconnect between what the data shows and what consumers, and businesses, feel. As economists and strategists point to slowing inflation, consumers still feel the sting of higher prices overall. Prices, after all, do not usually decline.
Consider the price of eggs, which have fluctuated wildly over the past two years. Along with a select number of other goods and services, the price of a dozen eggs illustrates why public sentiment is currently sour. But that sour view is likely to quickly turn as supply conditions continue to improve, inflation growth eases and real wages rise.
The price of eggs
The pandemic shutdown and the shortfall of supply meeting demand was an obvious reason for staples like eggs to increase in price. For instance, from December 2019 to February 2021, the price of a dozen eggs increased from about $1.50 to $2.00, an increase of 30% over 26 months.
But an avian flu took hold in early 2022 and grew into the largest outbreak in American history. What followed was a widespread culling of the national chicken stock, sending the price of eggs even higher. By January 2023, egg prices had doubled to $4.80 a dozen in less than a year.
In December, another outbreak of avian flu resulted in an 8.9% increase in the price of eggs on a monthly basis even as the cost of that good declined 23.8% on a year-ago basis.
If one is comparing the economy using December 2019 as a starting point, then the price of eggs was up 33.2% compared to the recent disinflation in that good of roughly 24% compared to a year ago.
The grocery store is not the only place the increase in egg prices is being noticed. Nearly every prepared food item, from hamburger rolls to meatballs to brownies, has an egg ingredient.
So the rapid increase in the cost of eating at your favorite burger or Italian joint since 2020 is because of in part the increased cost of eggs and other staples. That does not include higher labor costs.
The good news is that by the fourth quarter of 2023, egg prices had dropped to $2.12 a dozen, still 22% higher than in the three months before the pandemic but falling at a yearly rate of 24% per year.
Whether that disinflationary trend continues will depend on if another outbreak of the bird flu were to occur.
Without a severe drop in demand for goods and services caused by a deep recession—outright deflation would be accompanied by a real decline in wages and high inflation—one should anticipate further modest disinflation in the goods sector and price stickiness in the service sector because of a tight labor market and rising nominal and real wages.
Overall, price levels are higher than they were before the pandemic. While the worst of inflation is behind us, it will take more time for consumers to change their spending patterns or to better absorb those additional costs as wages move higher in nominal and inflation-adjusted terms.
And while the price of eggs offers a prime example of an increase in price that could not be avoided, the higher cost of living hits every consumer, especially those with lower incomes.
The following is a quick series of vignettes that we think capture similar pricing dynamics that underscore consumers’ sour sentiment.
Energy
For many Americans, inflation is defined by their reading of gasoline prices that they see on their way to work every day.
In mid-November, the price of regular gasoline stood at $3.06 per gallon, down from the high of $5.01 on June 13, 2022. That plunge should be a net plus in one’s evaluation of the current economy but for some it is not.
Why is that?
The average price of gas dropped below $2 a gallon in 2020 because of a plunge in demand associated with the move to work at home and shutdown of global supply chains.
If one’s evaluation of inflation is where gasoline prices were in 2020 compared to today, then it is understandable that one might view inflation as a pressing issue.
But if one looks at why the price of gasoline was so low in 2020, that evaluation needs to be placed in the context of Trump-era emergency policies and the price shocks that followed.
Read more of RSM’s insights on the economy and the middle market.
The price of gasoline between 2015 and 2020 averaged $2.44 per gallon, so the $3.06 per gallon once adjusted for inflation does not seem out of line.
As of December, the national average price of gasoline had dropped to $3.10 a gallon but remained 22% higher than before the pandemic. Gas prices declined at an average rate of 9.3% per year last year.
The cost of diesel fuel, a key part of the supply chain, remains 34% higher than before the pandemic but is falling at a rate of 15% per year.
The price of heating your home with fuel oil remains 36% higher than at the end of 2019 but is falling at a rate of 15% per year. The cost of electricity was 28% higher and is increasing by 3.4% per year.
Transportation
Trends in the cost of used cars and trucks are nearly identical to those in the overall cost of transportation commodities, which allows us to use used cars and trucks it as a proxy for transportation costs.
The shortage of computer chips during the pandemic delayed the production of new vehicles, which developed into a surge in demand for used vehicles. As such, the inflation rate for used vehicles peaked at 45% per year in 2021.
Prices of used vehicles remain 36% higher than at the end of 2019 but fell at an average rate of 7.6% per year in 2023.
Note that the shortage of chips also had knock-on effects that included a sell-off of rental vehicles during the pandemic. That resulted in a vehicle shortage once the pandemic ended, which increased the cost of rentals.
Housing
The tight housing market is a constant reminder of how housing preferences changed during the pandemic, and the end of low-for-long interest rates. This is especially true for young people looking to buy their first home.
Using the housing component of the Consumer Price Index, housing costs are 21% higher than before the pandemic and continued to increase at a rate of 5.1% per year in the fourth quarter.
That the rate of growth is decelerating can be attributed in part to the saturation of demand for housing and to the pause in monetary policy tightening. The prospect of lower interest rates gives prospective buyers the incentive to wait out the eventual easing of long-term interest rates.
Mortgage rates appeared to have finally peaked, but there is no guarantee that the market won’t pick up again in the spring.
Discretionary spending
Electronics: The cost of cell phone services plunged in 2017 and has pretty much flat-lined since then. The cost of cell service was falling at an average rate of 2.0% per year in the fourth quarter of last year. The cost of buying a television has also continued to drop. In fact, TV prices are 24% lower than before the pandemic and were falling at a rate of 9.7% per year in the fourth quarter.
Airline fares: Finally, the price of taking a vacation has returned to earth. Airline tickets are 3.6% lower than before the pandemic and were falling at a rate of 11.6% per year in the fourth quarter. We can surmise that the decreased cost is because of a leveling off of demand, with revenge travel having run its course, and as fuel prices have eased.
The takeaway
Prices of most goods and services remain higher than before the pandemic.
Despite a thriving economy, the public has not yet adjusted to the price level shock and that will simply take time.
While inflation continues to recede, higher prices continue to affect household finances, causing the public to evaluate the economy as sour.
We think that by midyear, many if not most Americans will begin to reshape their evaluation of the economy based on low unemployment, rising real wages and falling interest rates as inflation recedes toward our forecast of 2.5% by the end of the year.
