Economic Perception v. Reality
By almost every measure, inflation is coming down. That is every measure but one…what Americans believe.
It is amazing how perception guides reality. Almost everything is more expensive than what products and services cost pre-pandemic. Inflation for a time was roaring along. But for the past several months, the rate for most indexes has been 3% or slightly higher.
Yet people are convinced that inflation is still high. We remember what prices were 5 years ago and if you compare them to today, they are significantly higher. If you compare the cost today over 2022, then the rate of increase has slowed measurably.
That doesn’t mean that things will revert to prices of the past. For that matter, neither will wages. Most workers are earning more than they did pre-pandemic. In August 2023, inflation was 3.7% but wages increased by 5.3%. Neither wages nor prices will return to pre-pandemic levels.
What really is going on here is political more than having to do with economics. Republicans can’t have anything good happen on Biden’s watch. To help keep their unjust society rhetoric believable, some on the left need to have people believe that wage earners are suffering. Both cases are extremes.
Could our economy be better? Of course, it could. Heading into next year’s elections, more and more people will begin reacting to lowering inflation. Our economy could still have problems if the government is closed for an extended period or war expands to countries exporting oil and gas to the world market.
Biden could overplay his hand with his industrial policy. Likely even if he did, it would take several years for the economy to have a negative reaction. The Trump trade policy brought unnecessary chaos to markets especially with the imposition of tariffs (which Biden has kept) against China.
Tariffs make things more expensive to the manufacturer and consumer. It is a tax increase since the buyer of the goods pays it. An industrial policy like Biden’s may at first seem great, but as time goes on, those policies stifle innovation and markets become less and less able to react and correct.
Both tariffs and industrial policies lead to inflationary pressures. The best thing is to allow the market to decide prices, wages, and which entities can best do that. Fears of inflation should dissipate, but then depending on the next election they may be back again. Then the fears may be grounded in fact.
