Why Consumers and Economists Don’t See Eye-to-Eye on Inflation

While the Federal Reserve is starting to feel pretty good about inflation, consumers remain frustrated about price pressures.

A recent survey by Morning Consult showed that nearly two out of every three respondents believed that annual inflation was either much or somewhat higher than a year ago, even though inflation has slowed from last year no matter how you measure it.

“I think that consumers think about it differently than economists do,” said Sofia Baig, economist at Morning Consult.

So, why are consumers’ views of inflation different from the members of the Federal Reserve? One answer is consumers perceive price changes over time differently, Baig said.

Viewing Inflation Through Different Time Frames

Inflation is defined as an increase in prices of goods and services over time. However, while economists usually look at inflation on a monthly or annual basis, the survey showed that consumers have a longer view of price pressures.

“They understand what inflation is, they just don’t think about it from an annual or month-to-month basis like economists do,” Baig said. “They don’t feel like inflation is lower now because they’re not thinking about it from the same month last year.”

Most consumers look at price changes over at least two years, with the highest share, 28%, looking at price pressures over four years. 

For many, politics plays a role, and they relate price changes to presidential terms. However, many who see inflation in two-year periods are often tying it to the pandemic, Baig said. 

Wages Affect How Consumers Feel About Inflation

Many people also associate price changes with their wages, as about three in ten define inflation as the gap between wages and rising prices for goods and services.

Nearly six out of ten respondents said their pay hasn’t kept up with the pace of inflation, despite data showing that wages have grown more than prices. However, only 42% of Gen Z respondents answered the same way. 

“Gen Zers are more likely to be job switchers, and the people who switch jobs are the most likely to benefit from wage gains,” said Baig, who noted that older workers tend to stay in their positions. “Younger folks are more likely to jump around from job to job. They have less loyalty to their employers and they benefit from that.”