Americans have a very different understanding from economists of what inflation is and how the economy works.
The latest Daily Kos/Civiqs survey finds that pluralities of Americans—across party lines—think the problem of inflation won’t be solved until prices drop back down to where they were a few years ago; that in a good economy, prices will naturally drift downward; and that when inflation goes down, prices either go down or stay the same.
The vast majority also say that something went seriously wrong in the economy over the last few years. A large portion of the public even says that the recent bout of inflation was worse than what we experienced in the 1970s and ’80s.
We’ve recently seen many economists tout the strength of the latest economic numbers, with low unemployment, much lower inflation, and significant growth—and, even better, a reduction in inequality, meaning the benefits are accruing more to those who need it most. And when people talk about this good news in the press or on social media … the pushback is ferocious and intense. Which leads to the question: Why is there this disconnect between the data and the public?
The answer, according to many, is simply and obviously that the economy is actually in a very sorry state. In fairness to this viewpoint, even when aggregate economic numbers show good news, that is in no way inconsistent with tens of millions of Americans being worse off—and the motivation to speak up is greater when you see data contradicting your lived experience.
But polling shows that this negative view of the economy is widespread. The majority of the public—including, notably, young Democrats—says that the economy is in bad shape right now. And the culprit? Inflation.
The results of our new poll suggest an even more fundamental disconnect: People do not use economic terms in the same way as economists do. Language itself is a barrier to understanding. On top of that, the public has certain expectations of the economy that the economy will never be able to meet.
Price goes up
The latest reading of inflation for groceries stands at 2.1% on an annual basis. That means that, on average, Americans paid $102 for groceries this October that would have cost them $100 a year ago. This is a small difference, and most people would be hard-pressed to notice this change.
However, when asked what has happened to grocery prices in their area in the past year, almost everybody—88% of those surveyed—said prices had gone up. Only 5% said prices had “remained about the same.” Either nearly everybody is keeping very careful track of grocery prices, or people are inadvertently comparing current prices to what they were used to more than a year ago.
It’s easy to understand price increases and easy to remember what prices were in the recent past. It’s a lot harder to remember when exactly the price increased. Recent research suggests the effect of inflation on consumer sentiment has a half-life of about a year, meaning that it would take several years after a period of high inflation has ended before high prices are no longer a drag on economic opinions.
It’s also easy to conflate absolute increases in price with inflation itself. We go to the store, see that our favorite cheese is now $7.99 instead of $5.99, and can immediately grasp that the price has gone up. Why? Well, inflation, of course—the news says so. And so now we have “inflation = prices up” engraved in our minds.
People are not happy with high prices, and they want them to go down. They want them to go down so much that they would prefer to see lower prices rather than a raise in pay. A full 50% of Americans agree that “solving the inflation problem means that prices should go back to where they were a few years ago.” This is understandable! Who wouldn’t want things to go back to normal, right?
Well, economists tell us nobody should be happy about that idea. If prices fell by around 20%, a reversal of the increases since the pandemic began, that would imply something pretty grave has happened in the economy, and likely result in—or be caused by—a severe recession.
Nobel laureate Paul Krugman recently observed, for instance, that when the United Kingdom sought to actually lower prices following World War I, the result was a decade of high unemployment, even as the United States prospered during much of the 1920s.
That doesn’t mean, of course, that people who want to see lower prices are rooting for recession (although some partisan Republicans might be). Rather, people are likely to be unaware that it would probably take a recession for prices to go back down.
The good, the bad, and the expensive
We asked another question to see what people think a good economy is like: “In a ‘good’ economy, what do you expect to happen to prices of things like gas, groceries, and consumer goods over time?”
A plurality of 44% said that prices would decrease slowly over time—what economists call “deflation”—which would likely indicate poor economic growth and imply widespread misery. Only 26% said that prices would increase slowly over time (in other words, low inflation), which is what we actually observe during periods when people describe the economy as “good.”
Inflation is not an intuitive concept to begin with. It measures how fast prices are changing. But when you start talking about how inflation itself is changing, that’s the change in the change in prices, which is even harder to grasp. And indeed, the news these days is talking about inflation going down. But what do people think that means? So we asked, “If inflation goes down, what do you expect to happen to prices?” to see how people interpret what they might see in the news.
If inflation continues to go down (economists call this “disinflation”), it could go down to the level we’ve been used to in recent decades—around 2% per year—where prices are still increasing but not as quickly. Or it could fall all the way to zero, meaning prices are staying the same; we came very close to this in 2015. It could even fall to negative values, meaning we have deflation, and prices are falling. We’ve seen this just once since 1960 on an annual basis, in the depths of the recession in 2009 (and then just barely).
So what do people think will happen? Well, 67% responded that they would expect prices to go down or stay the same if inflation goes down.
The public, broadly speaking, has expectations when they hear news of inflation falling that are unlikely to be met and don’t match their observation of recently rising prices. And when you think the government is telling you one thing, but your own eyes tell you something else … well, who are you going to believe? And who are you going to get mad at?
It’s easy to see how this could happen. If we’ve equated “inflation = prices up” in our minds as a shortcut for understanding inflation, then a lack of inflation must mean prices go down. Or, at least, stop going up. It’s intuitive, as opposed to economists’ definition of inflation.
What is normal, anyway?
But wait, there’s more. Americans also overwhelmingly believe that the recent bout of inflation is a sign something is fundamentally broken in our economy: It’s not that it’s something that happens occasionally, like a recession or high unemployment, but it’s something that should not happen.
To be exact, 70% said that recent price increases “should not have happened in a well-functioning economy; something went seriously wrong.” Just 18% said that such increases “can happen even in a well-functioning economy; it was not a sign of a deeper problem.”
This question (unlike most in our survey) had a major partisan split, with Republicans almost uniformly eager to cast aspersions on Joe Biden’s presidency, while only a 43% plurality of Democrats say the price increases should not have happened in a healthy economy.
But what’s interesting is that this time there is a clear age gradient among both Democrats and independents. Older voters, who lived through the inflation of the 1970s and 1980s as adults, are more likely to say price increases can happen in a healthy economy. Indeed, 53% of Democrats over the age of 65 say so, compared with just 22% of Democrats under 35.
This age gradient shows up again, and for the same reason, in the final question we’ll address in this piece (but you can find more questions in our survey). When asked which round of inflation was worse—the most recent or that in the 1970s and 1980s—a plurality of Americans (37%) chooses the most recent bout. Again, we have some partisan motivation here: Half of Republicans say this. Among Democrats, however, half of those over the age of 65 (correctly) say the inflation of 40 years ago was worse. Younger Democrats mostly say they don’t know enough to compare.
From a political standpoint, however, it’s notable that 28% of Biden voters say the recent inflation was as bad as or worse than the inflation of the 1970s and 1980s. That’s nearly one out of every three Biden voters.
Listening to the people
So it’s clear that the voting public has a different set of expectations and understandings when it comes to how the economy functions. Politicians need to meet voters where they’re at in order to communicate. And since economic behavior can follow from economic expectations, economists need to know how people believe the economy functions, whether those beliefs comport with formal definitions or not.
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