Opinion

Consumers Are Resisting Inflation

The Consumer Price Index rose 6.2 percent in the 12 months through October, the worst inflation since 1990 and a jump from the annual price growth rate of 1.9 percent over the previous decade. The good news is that consumers are putting up a fight against it.

That’s clear in the chart below, which is based on data from the University of Michigan’s long-running Surveys of Consumers. Randomly chosen people are asked every month if they think it’s a good time to buy various things: cars, houses and large household goods “such as furniture, a refrigerator, stove, television.” You can see the share of people who said it was a good time to make purchases dropped sharply when the pandemic-led recession hit, then rebounded, and has since fallen even more, along with the steep rise in inflation.

That’s a sign that people are hurting from inflation, for sure, but it’s also evidence that they see today’s high prices as temporary. If they thought inflation was going to remain this high or even go higher they would probably want to buy now to beat the next price hike. The time to really worry about inflation is when people indicate they’re willing to buy goods even in the face of sharp price increases.

I like the “good time to buy” question because it’s not explicitly about the politicized term “inflation,” so it’s less influenced by what pundits and influencers are saying or what respondents think of the current occupant of the White House. It asks people a question they’re probably asking each other at the dinner table, so the answers tend to be considered and judicious.

As it happens, the University of Michigan’s direct questions about inflation give similar results. Consumers have understandably gotten more worried about inflation in the short term. The median forecast for consumer price increases over the course of the next year was 4.6 percent in September. (And it’s probably even higher now after the latest headlines.) But the median September forecast for average annual inflation over the next five to 10 years was just 3 percent — scarcely above the 2.7 percent that inflation has averaged since 2008.

The reason for focusing on inflation expectations is that they matter. A lot of the factors pushing up inflation at the moment will eventually go away, including supply-chain bottlenecks, production restraints by the oil cartel, and the infusion of pandemic relief money into the economy. For example, let’s say used car prices stay at today’s super high levels — you know how much that will contribute to inflation over the next year? Zero. To get inflation you need prices to continually rise, not just to be high.

Expectations are one of the forces that can drive prices steadily higher. Inflationary psychology might become ingrained in consumers, the business community or both. That could happen if people lose faith in the Federal Reserve’s ability or commitment to restraining inflation.

That’s not to say inflation is entirely in the mind. The labor market could remain dysfunctional, with lots of potential workers remaining on the sidelines despite an abundance of job openings. That would tend to push up wages and, with it, consumers’ ability to absorb price increases. Aneta Markowska, chief economist at the investment bank Jefferies, told me this week she wouldn’t be surprised to see the U.S. unemployment rate fall to 3 percent by the end of next year, from 4.6 percent last month. “I think we’re headed for what’s probably the tightest labor market since the ’50s,” she said. In 1953, when economic growth was strong and women were dropping out of the labor force to raise children, the unemployment rate got down to a record postwar low of 2.5 percent.

The brighter scenario is that the low unemployment rate and higher wages finally coax people back to work. That would be a positive for those workers and their families, but also for the rest of us because it would tamp down wage inflation. Markowska, despite her below-consensus forecast for the jobless rate, sees inflation receding to a range of 2.5 percent to 3 percent. Kathleen Bostjancic, chief U.S. financial economist for Oxford Economics, is looking for the Consumer Price Index to rise just 2.3 percent from the current quarter to the fourth quarter of 2022.

Worldwide, inflation will be pushed upward by a retreat from globalization but downward by the continuing progress of “digitization,” Matthew Luzzetti, chief U.S. economist for Deutsche Bank, told me. He says inflation will end up higher than it has been recently, but not nearly as high as it got to in the 1960s and 1970s, when over-easy monetary policy allowed inflation to get out of control.

It all comes back to expectations. “In the ’60s inflation expectations were unanchored,” Luzzetti said. “It’s probably more difficult for that to happen today.”


The readers write

I am a psychiatrist who works with severely mentally ill people. The most frustrating thing is to get people working and as soon as they make a steady wage they lose their Medicaid benefits, which pay for their treatment. Private insurance doesn’t pay for this kind of treatment. In one instance I had a fellow who improved enough to obtain gainful employment that came with health insurance. He was on a long-acting injectable medication which had kept him stable and able to work. The insurance company approved it … at 50 percent! The co-pay was $2,500! It might as well have been a million. I have countless examples like this. A simple solution is a single-payer health insurance plan like every other modern country has.

Paul Gitlin, M.D.

Camden, Del.


Quote of the day

“If someone is willing to pay for sex or a kidney, and a consulting adult is willing to sell, the only question the economist asks is: ‘How much?’”

— Michael J. Sandel, “What Money Can’t Buy: The Moral Limits of Markets” (2012)


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