Fed Claims Victory Over Inflation — So Why Does Life Still Feel So Expensive Then?
Because it is a lot more expensive
Recently, at its annual Jackson Hole conference, the Federal Reserve’s chair Jerome Powell announced victory over inflation. Inflation was headed steadily towards the Fed’s 2% target and was no longer a worry. Price stability had returned and now labor market weakness was the primary worry, setting the stage for interest rate cuts later this year.
Basically the Fed was saying that the toothpaste had been successfully put back in the tube and that all was good again on the inflation front. But if that’s so, why do millions of Americans seem to feel that life has become almost hopelessly expensive?
The answer is that the Fed only cares about the rate of change of prices. But what normal people actually experience in their day-to-day lives is the level of prices.
Yes the rate of change has slowed from more than 8% year-over-year in 2022 to just 3% now. Yet at no point over the past two years of inflation fighting did prices actually decline. There was never any deflation. The economic environment merely changed from one where prices were going up quickly to one where prices were going up less quickly — the key being that prices are still goin up even now.
