Persistent inflation sours public perception of a 'strong economy’

The U.S. economy looks great on paper, but Americans aren't buying it.

In a recent Reuters column, renowned financial journalist Jamie McGeever explores a puzzling disconnect between robust economic data and widespread public pessimism.

McGeever points out that despite historically low unemployment, rising real wages, and above-trend GDP growth, surveys show Americans remain pessimistic about the economy.

“So why is Wall Street's view not shared by Main Street?” asks McGeever. “The answer definitely has a lot to do with inflation, and probably a bit to do with political polarization widened by social media-fueled populism, misinformation and fear-mongering.”

This stark contrast between economic reality and public perception has caught the attention of academics and economists alike.

"The macroeconomic story is strong,” says Heidi Shierholz, the president of the Economic Policy Institute in Washington. “But there is a huge disconnect….It's that one-two punch of high price levels from the burst of inflation, and misinformation," she adds.

Americans can’t see past the effects of inflation

Despite positive economic indicators, inflation continues to loom large in the American psyche.

Minneapolis Fed President Neel Kashkari told The Financial Times that he's hearing that people would prefer a recession over inflation. However, as McGeever points out, this perception doesn't align with economic research.

A professor at Dartmouth College estimates that a rise of 1 percentage point in the unemployment rate lowers well-being by more than five times as much as an increase of 1 percentage point in inflation.

So why is Americans' hatred of inflation so strong? A Harvard study found that inflation’s impact is "deeply rooted in its perceived effect on people's financial well-being and the broader economy."

The study also found that political affiliations can shape economic perceptions.

Republicans were twice as likely as Democrats to fault President Biden, monetary policy, and fiscal policy for economic woes, with 41% of Republicans citing these factors compared to just 21% of Democrats.

“Biased sources of information” skew perceptions

On paper, Americans are rolling in dough. The Federal Reserve’s recent report showed household wealth jumped to $160 trillion, with a $5.1 trillion surge in just the first quarter of 2024.

Thanks to booming stocks and soaring home values, Americans are twice as rich as we were ten years ago.

Despite the surge in household wealth, a recent Gallup poll showed only a slight uptick in how people view their finances. So "what gives?" asks McGeever.

A Brookings study blames “biased sources of information" and "systematic bias in driving inaccurate perceptions about U.S. economic performance.”

McGeever warns that as the 2024 presidential debates near, this gap between how the economy looks on paper and how people actually feel about it could be a game-changer for politics.