Why are consumers pessimistic about the economy while inflation is cooling?

Inflation hit the highest level in four decades a little more than two years ago, and while it has cooled substantially since then and the labor market has remained resilient despite high interest rates, American consumers are still feeling squeezed by it.

The economy is the top issue for voters as they cast their ballots ahead of Election Day on Tuesday, and while pocketbook concerns are often at the forefront of voters’ minds, that’s particularly true in the wake of a historic inflationary cycle that hit the economy in recent years.

Inflation surged to a 40-year high of 9.1% on an annual basis in June 2022 in the wake of pandemic-related supply chain disruptions and an influx of federal spending on relief programs. Though it has since ebbed to 2.4% in September and the labor market has remained solid amid the Federal Reserve hiking interest rates to slow the pace of inflation, prices are still about 20% higher than they were four years ago.

Gregory Daco, chief economist for EY-Parthenon, told FOX Business that the disconnect between the improvement in economic measurements of inflation and Americans’ assessment of the economy overall is based on their assessment of price levels for items they purchase day-to-day compared to years past.

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“Most people talk about inflation when they talk about price levels, and so you’ll often hear people talk about, ‘gas prices are higher, I’m paying that much more for my groceries, I’m paying that much more when I go to the restaurant.’ That’s a reflection of price levels, not so much of how much prices have increased over the past year, which is the common measure of inflation,” he explained.

“So there is that dissatisfaction and that negative sentiment of people comparing prices to where they were four or five years ago rather than where they were a year ago. That’s one of the key elements of this paradox between the economy doing relatively well, but people still feeling fairly gloomy,” Daco added.

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Daco noted that the economy seems to have achieved the “soft landing scenario” because inflation is near the Federal Reserve’s 2% target and the economy is still relatively robust, but Americans’ memories of economic conditions in the past few years have dimmed their view of how healthy the broader economy is in the current moment.

“What this means for most people is that you have an environment where if you ask most Americans how they’re feeling about their own conditions, they’ll say generally decent… things are okay. When you ask them about the broader economy, they generally tend to have a bit more of a pessimistic perspective, and I think that’s reflective of what’s happened over the past few years in terms of excessively high inflation, much higher interest rates,” he explained.

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Lawrence Sprung, a CFP and wealth adviser who founded Mitlin Financial, expressed a similar sentiment in an interview with FOX Business about the past few years informing Americans’ views of the economy.

“Looking back at what’s taken place over the last several years, I think people are somewhat shell-shocked to some degree between COVID, between inflation skyrocketing only a couple of years ago, and the effects of that still being seen in some cases at the cash register,” he said. “Then the uncertainty and everything surrounding the election, those few things are keeping people a little bit on edge, so to speak.”

“I think as long as employment continues to be robust, as long as we see wage growth and those things, I think those really put in a position — and I guess some would argue we’ve already seen the soft landing, or maybe there was no landing at all because we just kind of glided right in,” Sprung explained. 

“Some of this stuff is just being trudged up again because of the uncertainty around the election. I think that is really making folks a little bit more uneasy,” he said. “It reminds me of where we were even four years ago in the election cycle — it was very similar, there was this uneasiness leading into the election. That did last a little while, but once we got it past it, we had the certainty, things started moving in a better direction.”