Inflation (Economics)

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      Why Americans Are (Still) Mad About Inflation

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      The United States has seen a steady decline in the rate of inflation, and yet many American voters are still upset over the cost of daily life. To understand this perception gap, Paul Donovan, the chief economist of UBS Global Wealth Management, argues, we should consider the cost of a Snickers Bar. In this audio essay, he explains that frequent smaller purchases — like candy bars — shape our experience of the economy.(A full transcript of this audio essay will be available midday on the Times website.)Illustration by Akshita Chandra/The New York Times; Photograph by Matt Cardy/Getty ImagesThe Times is committed to publishing a diversity of letters to the editor. We’d like to hear what you think about this or any of our articles. Here are some tips. And here’s our email: letters@nytimes.com.Follow the New York Times Opinion section on Facebook, X (@NYTOpinion) and Instagram.This episode of “The Opinions” was produced by Jillian Weinberger. It was edited by Kaari Pitkin and Annie-Rose Strasser. Mixing by Sonia Herrero and Pat McCusker. Original music by Carole Sabouraud. Fact-checking by Kate Sinclair. Audience strategy by Kristina Samulewski. More

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      The Snickers Bar Is the Economic Indicator We Need

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      The United States has just experienced one of the biggest collapses in consumer inflation in modern history. In June 2022 consumer prices had risen 9.1 percent over the previous year. By December 2023 the rate of increase had slowed to 3.4 percent. And yet, in survey after survey, voters still declare inflation to be at or near the top of their list of concerns.Why aren’t voters recognizing the decline in the inflation rate? Because voters are humans, and humans don’t think about inflation rationally. To understand why, let’s look at a Snickers bar.More than 12 Snickers bars are sold every second in the United States. That makes Snickers bars a very important part of consumer purchases, and so the price of a Snickers bar should be included in the inflation calculation. Yet Snickers bars do not consume a big portion of most families’ annual budget (at least they usually don’t).Most of us will spend far more of our budget on something like a television. With $1,500 a consumer could buy a high-end 55-inch television, or almost four Snickers bars a day for a year. Because items in the consumer price basket are weighted, roughly, by how much money consumers spend on that item in a year, television prices are more important than Snickers bars in the calculation of inflation.However, we probably buy a Snickers bar much more frequently, perhaps even daily. So we’re much more likely to remember the price of the Snickers bar and forget the price of the television we bought last year. Consumers tend to think only about the prices of high-frequency purchases — food for the family and fuel for the S.U.V.The different inflation rates for infrequent and frequent purchases is a big part of why consumers mistakenly believe inflation is higher than it actually is. The prices of more expensive goods like furniture and consumer electronics are actually falling — and have been falling for over a year. Once the post-pandemic surge in demand for electronics, furniture and similar items faded, manufacturers were unable to maintain higher prices, pulling the reported inflation numbers lower.We are having trouble retrieving the article content.Please enable JavaScript in your browser settings.Thank you for your patience while we verify access. If you are in Reader mode please exit and log into your Times account, or subscribe for all of The Times.Thank you for your patience while we verify access.Already a subscriber?  More

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      Inflation Is Moderating, but Pressure Remains on Biden

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      President Biden has yet to benefit from moderating inflation, and data set for release on Thursday could complicate the White House’s attempts to show progress on rising prices.The Consumer Price Index is expected to show that overall inflation climbed slightly more quickly in December than in November on a yearly basis.Yet “core” inflation — a key measure that strips out volatile food and energy prices — is expected to have climbed 3.8 percent over the year through December, down from 4 percent in November. If that happened, it would be the first time that the core index had dropped below 4 percent since May 2021.But that moderation has not stopped Mr. Biden’s rivals from using high prices as a cudgel to criticize his economic stewardship.This week, former President Donald J. Trump, the front-runner for the Republican presidential nomination, blamed Mr. Biden for rising prices as he campaigned in Iowa before Monday’s caucuses there.“Our Middle Class is being crushed by Biden’s crippling inflation,” Mr. Trump said on the website Truth Social.Polls have shown that voters have a downbeat view of Mr. Biden’s economic record. Despite a strong labor market, higher costs and interest rates have left Americans feeling poorer.The politics of inflation have also infiltrated the Republican primary race, with Mr. Trump’s leading rivals, Gov. Ron DeSantis of Florida and Nikki Haley, the former United Nations ambassador, suggesting that Mr. Trump’s big spending policies when he was president set the stage for higher prices.“When it comes to our economy and getting inflation under control, the first thing we need to do is claw back the over $100 billion of unspent Covid dollars that are still out there,” Ms. Haley said during a town hall hosted by CNN this week.Mr. DeSantis, at a Fox News town hall this week, blamed lawmakers from both parties for borrowing too much money during the pandemic, but said rising incomes in his state were helping people cope with “Biden inflation.”Senior Biden administration officials are hopeful that as inflation moderates, voters will feel better about the economy.“The Biden administration is doing everything it can to lower costs that affect Americans,” Treasury Secretary Janet L. Yellen told reporters at an event in Virginia on Monday. “I think sentiment will improve over time.” More

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      Why Donald Trump Will Soon Be Attacking the Fed

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      Interest rates are heading down. Maybe not today, and maybe not tomorrow, but soon, and for the rest of this year (at least).Why? Because there are very good reasons for the Federal Reserve, which controls short-term interest rates — that’s how it makes monetary policy — to start reversing the sharp rate hikes it carried out beginning in March 2022. There’s a vigorous debate about whether those rate hikes were excessive, which I’m not going to litigate here. Whatever you think about past policy, the case for cuts going forward is very strong, and I hope the Fed will act on that case.What I don’t know is whether the Fed is ready for the political firestorm it’s about to face, and whether it will stand up to the pressure to keep rates too high for too long. Because it’s a safe prediction that Donald Trump and his supporters will scream that the coming rate cuts are part of a deep-state conspiracy to re-elect President Biden.Let’s talk first about the economics, which should — but might not — be the only thing guiding the Fed’s decisions.The Fed raised rates in an attempt to rein in inflation, which was running hot at the time — its preferred measure of underlying inflation was running far above its target rate of 2 percent. It kept raising rates until the middle of 2023, trying to cool off the economy and ensure that inflation came down.As it turns out, the economy still hasn’t cooled much, at least by the usual measures; the unemployment rate remains near a 50-year low. But inflation has plunged. Over the past six months, the core personal consumption expenditures deflator — try saying that five times fast — has risen at an annual rate of only 1.9 percent, below the Fed’s target, and more complex measures are close to 2 percent. Basically, the war on inflation is more or less over, and we won.So why keep interest rates this high? Right now the labor market looks a lot like it did on the eve of the pandemic, with both unemployment and other measures of market heat, like the rate at which workers are quitting, similar to what they were in late 2019. The Fed is projecting higher inflation over the next year than it was in 2019, but only slightly higher.Back then, however, the federal funds rate — the interest rate the Fed controls — was 1.75 percent. Now it’s 5.5 percent. It’s really hard to come up with a good reason it should stay that high.True, high rates haven’t produced a recession — yet. But there are hints of economic weakness, and the Fed is supposed to try to get ahead of the curve. So it’s time to start cutting rates.But rate cuts will have political implications. They will be good for Biden, although not exactly for the reasons you might think.I don’t know what the unemployment rate or the rate of economic growth will be in November, but because monetary policy works with a lag, what the Fed does in the next few months won’t have much effect on these numbers.Biden, however, is already presiding over a very good economy by normal standards, with solid job growth and plunging inflation. What he needs is for more Americans to accept the good news. And Fed rate cuts will help him with that. They will signal to the public that inflation really is under control; they will lead, other things being equal, to higher stock prices and lower mortgage rates.So we can expect howls from Trump and his allies that politics, not economics, is driving the coming rate cuts — even though Trump himself appointed Jerome Powell, the Fed’s chair.Why do we know this will happen? Partly because paranoia is MAGAworld’s normal condition: It sees sinister conspiracies everywhere.Beyond that, Trump and his allies constantly engage in projection, assuming that their opponents are doing or will do what they themselves would do or have done, like weaponizing the Justice Department for Trump’s own political ends.And when it comes to interest rate policy, Trump has a track record of doing exactly what I’m sure he will accuse Biden of doing: trying to manipulate the Fed. Ever since Richard Nixon pressured the Fed to keep rates low in 1972, possibly helping to set the stage for the stagflation that followed, it has been traditional for the White House to respect the Fed’s independence. But in 2019 Trump attacked Powell and his colleagues as “boneheads” and demanded that they cut interest rates to “ZERO, or less.”So we know that Trumpist attacks on the Fed for cutting interest rates are coming. What we don’t know is how the Fed will react.In a recent dialogue with me about the economy, my colleague Peter Coy suggested that the Fed may be inhibited from cutting rates because it’ll fear accusations from Trump that it’s trying to help Biden. I hope Fed officials understand that they’ll be betraying their responsibilities if they let themselves be intimidated in this way.And I hope that forewarned is forearmed. MAGA attacks on the Fed are coming; they should be treated as the bad-faith bullying they are.The Times is committed to publishing a diversity of letters to the editor. We’d like to hear what you think about this or any of our articles. Here are some tips. And here’s our email: letters@nytimes.com.Follow the New York Times Opinion section on Facebook, Instagram, TikTok, X and Threads. More

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      Want to Understand 2024? Look at 1948.

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      Americans were angry with Truman because of high prices in the aftermath of World War II, even as other economic signals looked promising.President Truman and his wife, Bess, during his 1948 whistle-stop campaign.Associated PressIn the era of modern consumer confidence data, there has never been an economy quite like this recent one — with prices rising so high and unemployment staying so low.But just a few years before the consumer sentiment survey index became widely available in 1952, there was a period of economic unrest that bears a striking resemblance to today: the aftermath of World War II, when Americans were near great prosperity yet found themselves frustrated by the economy and their president.If there’s a time that might make sense of today’s political moment, postwar America might just be it. Many analysts today have been perplexed by public dissatisfaction with the economy, as unemployment and gross domestic product have remained strong and as inflation has slowed significantly after a steep rise. To some, public opinion and economic reality are so discordant that it requires a noneconomic explanation, sometimes called “vibes,” like the effect of social media or a pandemic hangover on the national mood.But in the era of modern economic data, Harry Truman was the only president besides Joe Biden to oversee an economy with inflation over 7 percent while unemployment stayed under 4 percent and G.D.P. growth kept climbing. Voters weren’t overjoyed then, either. Instead, they saw Mr. Truman as incompetent, feared another depression and doubted their economic future, even though they were at the dawn of postwar economic prosperity.The source of postwar inflation was fundamentally similar to post-pandemic inflation. The end of wartime rationing unleashed years of pent-up consumer demand in an economy that hadn’t fully transitioned back to producing butter instead of guns. A year after the war, wartime price controls ended and inflation skyrocketed. A great housing crisis gripped the nation’s cities as millions of troops returned from overseas after 15 years of limited housing construction. Labor unrest roiled the nation and exacerbated production shortages. The most severe inflation of the last 100 years wasn’t in the 1970s, but in 1947, reaching around 20 percent.According to the historian James T. Patterson, “no domestic issue of these years did Truman more damage than the highly contentious question of what to do about wartime restraints on prices.”Mr. Truman’s popularity collapsed. By spring in 1948, an election year, his approval rating had fallen to 36 percent, down from over 90 percent at the end of World War II. He fell behind the Republican Thomas Dewey in the early head-to-head polling. He was seen as in over his head. The New Republic ran a front-page editorial titled: “As a candidate for president, Harry Truman should quit.”Hubert Humphrey, mayor of Minneapolis and later a vice president and Democratic presidential nominee, spoke before a Senate committee on anti-inflation controls in 1948.Associated PressIn retrospect, it’s hard to believe voters were so frustrated. Historians generally now consider Mr. Truman one of the great presidents, and the postwar period was the beginning of the greatest economic boom in American history. By any conceivable measure, Americans were unimaginably better off than during the Great Depression a decade earlier. Unemployment remained low by any standard, and consumers kept spending. The sales of seemingly every item — appliances, cars and so on — were an order of magnitude higher than before the war.Yet Americans were plainly dissatisfied. Incomes in 1948 were twice what they were in 1941, but statistically their dissatisfaction is probably best explained by the decline in real incomes in 1947, just as real incomes declined in 2021-22. The polling in the run-up to the 1948 election — archived at the Roper Center — bears the hallmarks of voter dissatisfaction:Despite the extraordinarily positive developments of the last decade, voters were pessimistic about the future. They believed a depression was likely in the next few years. As late as summer 1948, they were likelier to think things in America would get worse in the years ahead than to get better. They expected prices to keep rising.In November 1947, Gallup found that more than two-thirds of Americans said they were finding it harder to make ends meet than the year before, while almost no one said it was easier.In polling throughout 1947 and 1948, a majority supported reinstating wartime rationing and price controls.In December 1947, more than 70 percent of adults said they would want their own wages to decline in order to bring prices down.Prices seemed to weigh heavily on Americans heading into the election. Voters said that if they got a chance to talk with Mr. Truman about anything, it would be the cost of living and getting the economy back to normal. Ahead of the conventions, voters said a plan to address high prices was the No. 1 priority they wanted in a party platform. More voters said they wanted prices to be addressed over the next four years than any other issue.A rally for equal rights outside the 1948 Democratic convention in Philadelphia.Bettman/Getty ImagesThe Dixiecrats, a breakaway segregationist party, held a convention of their own in Birmingham, Ala.Bettmann/Getty ImagesThe importance of the economic issue faced stiff competition from the rising Cold War, the enactment of the Marshall Plan, the Berlin airlift, the formation of Israel and the subsequent First Arab-Israeli War, Mr. Truman’s decision to desegregate the military and the rise of the Dixiecrats.The Cold War, civil rights, Israel and other domestic issues combined to put extraordinary political pressure on an increasingly fractured Democratic coalition. On the left, the former vice president Henry Wallace ran against Mr. Truman as a Progressive; he also ran as someone who was unequivocally pro-Israel, threatening to deny Mr. Truman the support of Jewish voters who had voted all but unanimously for Franklin D. Roosevelt. On the right, the segregationist South defected from the Democrats at the convention over the party’s civil rights plank, again threatening to deny him the support of an overwhelmingly Democratic voting bloc.Truman and the Republican nominee, Thomas Dewey, in August 1948. Dewey led in the polls.Nat Fein/The New York TimesHe won, actually.Frank Cancellare/United Press InternationalIn the end, Mr. Truman won in perhaps the most celebrated comeback in American electoral history, including the iconic “Dewey Beats Truman” headline and photograph. He had barnstormed the country with an economically populist campaign that argued Democrats were on the side of working people while reminding voters of the Great Depression. You might well remember from your U.S. history classes that he blamed the famous “Do Nothing Congress” for not enacting his agenda.What you might not have learned in history class is that Mr. Truman attacked the “Do Nothing Congress“ first and foremost for failing to do anything about prices. The text of his speech at the Democratic convention does not quite do justice to his impassioned attack on Republicans for failing to extend price controls in 1946, and for their platform on prices. Finally, he called for a special session of Congress to act on prices and housing shortages (the links correspond to the YouTube video of those parts of his convention speech, for those interested). In short, congressional failure to act on prices was central to his critique of Republicans.In this respect, Mr. Truman was probably in a stronger position than Mr. Biden. Mr. Truman could blame Republicans for inflation; he could argue he had a solution for inflation; and he could link his position on inflation to his broader message about the Democrats as a party for working people. Polling at the time suggested that voters supported price controls, supported his special session, and did not necessarily blame Mr. Truman for inflation. In fact, more voters blamed Congress, business and labor than the president himself.Where Mr. Biden can still hope to match Mr. Truman is in economic reality, as inflation today is falling just as it was in the run-up to the 1948 election.In January 1948, inflation was 10 percent; by the end of October, it had fallen by half, and would reach one percent by January 1949. At election time, only 18 percent of voters expected prices would be higher in six months; just a few months earlier in June, a majority did so. It seems reasonable to wonder whether Mr. Truman might have lost the election had it been held a few months earlier.Despite those excellent conditions for a comeback, Mr. Truman’s electoral weakness was still stark. He had a powerful message and an improving economy, but he won by just 4.5 percentage points. The third-party candidates Mr. Wallace and Strom Thurmond succeeded in denying Mr. Truman key elements of the Democratic base that the party might have imagined it could take for granted just a few years earlier. He lost much of the Deep South without the support of the Dixiecrats and even lost New York, thanks to considerable defections on the left and among Jewish voters. No Democratic presidential would ever again reassemble the so-called New Deal coalition.But if 1948 is a mixed precedent for Mr. Biden, it’s a good precedent for today’s sour economic mood. It might betray a simple fact about public opinion: Voters hate inflation so much that they won’t ever like the economy if prices go up. There is no precedent in the era of consumer sentiment data for voters to have an above-average view of the economy once inflation cracks 5 percent — the recent high was 9 percent in June 2022 — even when unemployment is extremely low. It may just be that simple; indeed, consumer sentiment has begun to tick up over the last year, as inflation has declined to 3 percent.Alternately, 1948 and this era may suggest a more complex lesson about public opinion in the wake of pandemic or war, as high postwar and post-pandemic expectations quickly get dashed by the reality that the world isn’t returning to “normal” quite so quickly. Not only are high hopes dashed, but they also yield many kinds of economic dysfunction beyond high prices, from supply chain problems and housing shortages to “help wanted” signs and rising interest rates.Indeed, the famous “return to normalcy” election in 1920 — the largest popular vote landslide in American history — followed World War I and the 1918-1920 flu pandemic, which brought a recession and even higher inflation than in the 1940s.Normalcy did not come fast enough to save the party in power in 1920, the Democrats, but in retrospect it wasn’t too far off. The Roaring Twenties were just around the corner. And normalcy was just beginning to arrive in 1948, when Mr. Truman won re-election. The country was at the dawn of the prosperous, idealized 1950s “Leave It to Beaver” era that still lingers in the public imagination.If something similar is almost at hand, it can’t come soon enough for Mr. Biden. More

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      Is the American Economy on the Mend?

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      Almost four years have passed since Covid-19 struck. In America, the pandemic killed well over a million people and left millions more with lingering health problems. Much of normal life came to a halt, partly because of official lockdowns but largely because fear of infection kept people home.The big question in the years that followed was whether America would ever fully recover from that shock. In 2023 we got the answer: yes. Our economy and society have, in fact, healed remarkably well. The big remaining question is when, if ever, the public will be ready to accept the good news.In the short run, of course, the pandemic had severe economic and social effects, in many ways wider and deeper than almost anyone expected. Employment fell by 25 million in a matter of weeks. Huge government aid limited families’ financial hardship, but maintaining Americans’ purchasing power in the face of a disrupted economy meant that demand often exceeded supply, and the result was overstretched supply chains and a burst of inflation.At the same time, the pandemic reduced social interactions and left many people feeling isolated. The psychological toll is hard to measure, but the weakening of social ties contributed to a range of negative trends, including a surge in violent crime.It was easy to imagine that the pandemic experience would leave long-term scars — that long Covid and early retirements would leave us with a permanently reduced labor force, that getting inflation down would require years of high unemployment, that the crime surge heralded a sustained breakdown in public order.But none of that happened.You may have heard about the good economic news. Labor force participation — the share of adults in today’s work force — is actually slightly higher than the Congressional Budget Office predicted before the pandemic. Measures of underlying inflation have fallen more or less back to the Federal Reserve’s 2 percent target even though unemployment is near a 50-year low. Adjusted for inflation, most workers’ wages have gone up.For some reason I’ve heard less about the crime news, but it’s also remarkably good. F.B.I. data shows that violent crime has subsided: It’s already back to 2019 levels and appears to be falling further. Homicides probably aren’t quite back to 2019 levels, but they’re plummeting.None of this undoes the Covid death toll or the serious learning loss suffered by millions of students. But overall both our economy and our society are in far better shape at this point than most people would have predicted in the early days of the pandemic — or than most Americans are willing to admit.For if America’s resilience in the face of the pandemic shock has been remarkable, so has the pessimism of the public.By now, anyone who writes about the economic situation has become accustomed to mail and social media posts (which often begin, “You moron”) insisting that the official statistics on low unemployment and inflation are misleading if not outright lies. No, the Consumer Price Index doesn’t ignore food and energy, although some analytical measures do; no, grocery prices aren’t still soaring.Rather than get into more arguments with people desperate to find some justification for negative economic sentiment, I find it most useful to point out that whatever American consumers say about the state of the economy, they are spending as if their finances are in pretty good shape. Most recently, holiday sales appear to have been quite good.What about crime? This is an area in which public perceptions have long been notoriously at odds with reality, with people telling pollsters that crime is rising even when it’s falling rapidly. Right now, according to Gallup, 63 percent of Americans say that crime is an “extremely” or a “very” serious problem for the United States — but only 17 percent say it’s that severe a problem where they live.And Americans aren’t acting as if they’re terrified about crime. As I’ve written before, major downtowns have seen weekend foot traffic — roughly speaking, the number of people visiting the city for fun rather than work — recover to prepandemic levels, which isn’t what you’d expect if Americans were fleeing violent urban hellscapes.So whatever Americans may say to pollsters, they’re behaving as if they live in a prosperous, fairly safe (by historical standards) country — the country portrayed by official statistics, although not by opinion polls. (Disclaimer: Yes, we have vast inequality and social injustice. But this is no more true now than it was in earlier years, when Americans were far more optimistic.)The big question, of course, is whether grim narratives will prevail over relatively sunny reality in the 2024 election. There are hints in survey data that the good economic news is starting to break through, but I don’t know of any comparable hints on crime.In any case, what you need to know is that America responded remarkably well to the economic and social challenges of a deadly pandemic. By most measures, we’re a nation on the mend. Let’s hope we don’t lose our democracy before people realize that.The Times is committed to publishing a diversity of letters to the editor. We’d like to hear what you think about this or any of our articles. Here are some tips. And here’s our email: letters@nytimes.com.Follow the New York Times Opinion section on Facebook, Instagram, TikTok, X and Threads. More

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      Will the Economy Help or Hurt Biden ’24? Krugman and Coy Dig Into Data.

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      Peter Coy: Paul, I think the economy is going to be a huge problem for President Biden in 2024. Voters are unhappy about the state of the economy, even though by most measures it’s doing great. Imagine how much unhappier they’ll be if things get worse heading into the election — which I, for one, think is quite likely to be the case.Paul Krugman: I’m not sure about the politics. We can get into that later. But first, can we acknowledge just how good the current state of the economy is?Peter: Absolutely. Unemployment is close to its lowest point since the 1960s and inflation has come way down. That’s the big story of 2023. But 2024 is a whole ’nother thing. I think there will be two big stories in 2024. One, whether the good news continues, and two, how voters will react to whatever the economy looks like around election time.Paul: Right now many analysts, including some who were very pessimistic about inflation last year, are declaring that the soft landing has arrived. Over the past six months the core personal consumption expenditures deflator — a mouthful, but that’s what the Federal Reserve targets — rose at an annual rate of 1.9 percent, slightly below the Fed’s 2 percent target. Unemployment is 3.7 percent. The eagle has landed.Peter: I question whether we’ve stuck the soft landing. I do agree that right at this moment things look really good. While everyone talks about the cost of living going up, pay is up lately, too. Lael Brainard, Biden’s national economic adviser, points out that inflation-adjusted wages for production and nonsupervisory workers are higher now than they were before the Covid pandemic.So let’s talk about why voters aren’t feeling it. Is it just because Biden is a bad salesman?Paul: Lots of us have been worrying about the disconnect between good numbers and bad vibes. I may have been one of the first people to more or less sound the alarm that something strange was happening — in January 2022! But we’re all more or less making this up as we go along.The most informative stuff I’ve seen recently is from Briefing Book, a blog run by former White House staffers. They’ve tried to put numbers to two effects that may be dragging consumer sentiment down.One effect is partisanship. People in both parties tend to be more negative when the other party controls the presidency, but the Briefing Book folks find that the effect is much stronger for Republicans. So part of the reason consumer sentiment is poor is that Republicans talk as if we’re in a depression when a Democrat is president, never mind reality.Peter: That is so true. And I think the effect is even stronger now than it used to be because we’re more polarized.Paul: The other effect affecting consumer sentiment is that while economists tend to focus on relatively recent inflation, people tend to compare prices with what they were some time in the past. The Briefing Book estimates suggest that it takes something like two years or more for lower inflation to show up in improved consumer sentiment.This is one reason the economy may be better for Democrats than many think. If inflation really has been defeated, many people haven’t noticed it yet — but they may think differently a little over 10 months from now, even if the fundamentals are no better than they are currently.I might add that the latest numbers on consumer sentiment from several surveys have shown surprising improvement. Not enough to eliminate the gap between the sentiment and what you might have expected from the macroeconomic numbers, but some movement in a positive direction.Peter: That makes sense. Ten months from now, people may finally be getting over the trauma of high inflation. On the other hand, and I admit I’m not an economist, I’m still worried we could have a recession in 2024. Manufacturing is soft. The big interest rate increases by the Fed since March 2022 are hitting the economy with a lag. The extra savings from the pandemic have been depleted. The day after Christmas, the Federal Reserve Bank of St. Louis said the share of Americans in financial distress over credit cards and auto loans is back to where it was in the depths of the recession of 2007-9.Plus, I’d say the labor market is weaker than it looked from the November jobs report. (For example, temp-agency employment shrank, which is an early warning of weak demand for labor.)Also, small business confidence remains weak.Paul: Glad you brought up small business confidence — I wrote about that the other week. “Hard” indicators like hiring plans are pretty strong. “Soft” indicators like what businesses say about future conditions are terrible. So small businesses are in effect saying, “I’m doing OK, and expanding, but the economy is terrible” — just like consumers!I’m not at all sure when the Fed will start cutting, although it’s almost certain that it eventually will, but markets are already effectively pricing in substantial cuts — and that’s what matters for the real economy. As I write this, the 10-year real interest rate is 1.69 percent, down from 2.46 percent around six weeks prior. Still high compared with prepandemic levels, but financial conditions have loosened a lot.Could there be a recession already baked in? Sure. But I’m less convinced than I was even a month ago.Peter: The big drop in interest rates can be read two ways. The positive spin is that it’ll be good for economic growth, eventually. That’s how the stock market is interpreting it. The negative spin is that the bond market is expecting a slowdown next year that will pull rates down. Also, what if the economy slows down a lot but the Fed doesn’t want to cut rates sharply because Fed officials are afraid of being accused by Donald Trump of trying to help Biden?Paul: I guess I think better of the Fed than that. And always worth remembering that the interest rates that matter for the economy tend to be driven by expectations of future Fed policy: The Fed hasn’t cut yet, but mortgage rates are already down substantially.Peter: Yes.Paul: OK, about the election. The big mystery is why people are so down on the economy despite what look like very good numbers. At least part of that is that people don’t look at short-term inflation, but at prices compared with what they used to be some time ago — but people’s memories don’t stretch back indefinitely. As I said, the guys at Briefing Book estimate that the most recent year’s inflation rate is only about half of what consumers look at, with a lot of weight on earlier inflation. But here’s the thing: Inflation has come way down, and this will gradually filter into long-term averages. Right now the average inflation rate over the past 2 years was 5 percent, still very high; but if future inflation runs at the 2.4 percent the Fed is now projecting, which I think is a bit high, by next November the two-year average will be down to 2.7 percent. So if the economy stays where it is now, consumers will probably start to feel better about inflation.Peter: Except that perceptions of inflation are filtered through politics. Food and gasoline are more expensive for Trump supporters than Biden supporters, if you believe what people tell pollsters. That’s not going to change between now and November.The Obama-Biden ticket beat the McCain-Palin ticket in 2008 because voters blamed Republicans for the 2007-9 recession. Obama-Biden had a narrower win in 2012 against Romney-Ryan, and I think one factor was the so-called jobless recovery from that same recession. That’s why Biden is supersensitive about who gets credit and blame for turns in the economy.For the record, Trump might be president right now if it hadn’t been for the Covid pandemic, which sent the unemployment rate to 14.7 percent in April 2020. The economy was doing quite well before that happened. A lot of Republicans are nostalgic for Trumponomics, although I think the economy prospered more in spite of him than because of him. Thoughts?Paul: Most of the time, presidents have far less effect on the economy than people imagine. Big stimulus packages like Barack Obama’s in 2009 and Biden’s in 2021 can matter. But aside from pandemic relief, which was bipartisan, nothing Trump did had more than marginal effects. His 2017 tax cut didn’t have much visible effect on investment; his tariffs probably on net cost a few hundred thousand jobs, but in an economy as big as America’s, nobody noticed.Peter: Just speculating, but I wonder if when people say they trust Trump more than Biden on the economy, they’re feeling vibes more than parsing statistics. You know, “We need a tough guy in the White House!”Paul: People definitely aren’t parsing statistics. Only pathetic nerds like us do that. And while Trump wasn’t actually a tough economic leader, he literally did play one on TV.But we don’t really know if that matters, or whether people are still reacting to the shock of inflation and high interest rates, which they hadn’t seen in a long time. Again, the best case for Biden pulling this out is that voters get over that shock, with both inflation and interest rates rapidly declining.Oh, and falling interest rates mean higher bond prices, and often translate into higher stock prices, too — which has also been happening lately.Peter: True, Paul. But cold comfort for people who don’t own stocks and bonds. Or who do own stocks and bonds in their retirement plans but don’t think of themselves as part of the capitalist class. To win in November, Biden and his team are going to need to be perceived as doing something for the working class and the middle class. That’s why you see the White House talking about eliminating junk fees and capping insulin prices.Paul: For what it’s worth, I think a lot of people judge the economy in part by the stock market, even if they don’t have a personal stake. That’s why Trump boasted about it so much, and has lately been trying to say that Biden’s strong stock market is somehow a bad thing.Finally, there are some indications that Democrats in particular are feeling better about the Biden economy. The Michigan survey tracks sentiment by partisanship. The numbers are noisy, but over the past few months Democratic sentiment has been slightly more positive than it was in the months just before the pandemic struck.Peter: Paul, how important do you think the economy will be to voters compared to other issues, such as Trump’s fitness for office, Biden’s age, abortion access, et cetera? I mean, if it’s not important, why are we even having this conversation?Paul: The economy surely matters less than it did when Republicans and Democrats lived in more or less the same intellectual universe — everyone agreed that the economy was bad in 1980 or 2008; now, Dems are fairly positive while Republicans claim to believe that we’re in a severe downturn. But there are still voters on the margin, and weak Democratic supporters who will turn out if they have a sense that things are improving.Peter: Democratic strategists think the election might come down to Pennsylvania and Wisconsin, assuming that Biden holds Michigan and New Hampshire and loses Arizona and Georgia. Any thoughts about the economic outlook for Pennsylvania and Wisconsin?Paul: No strong sense about either state. But one little-noticed fact about the current economy is how uniform conditions are. In 2008, so-called sand states that had big housing bubbles were doing much worse than states that didn’t; now unemployment is low almost everywhere.Of course, all political bets are off if we have a recession. But there’s a reasonable case that the economy will be much less of a drag on Democrats by November, as the reality of a soft landing sinks in.Oh, and my subjective sense is that for whatever reason, media coverage of the economy has turned much more positive lately. I have to think this matters, otherwise, what are we even doing? And until recently, media reports tended to emphasize the downsides — “Great jobs numbers, and here’s why that’s bad for Biden” has become a sort of running joke among people I follow. These days, however, we’re starting to see reports acknowledging that we’ve had an almost miraculous combination of strong employment and falling inflation.Peter: Paul, what economic indicators will you be paying the most attention to in the next few months with regard to the election? I’ll nominate inflation and unemployment, although those are kind of obvious.Paul: Unemployment, for sure. On inflation, I’ll be watching longer-term measures: Will inflation be low enough to bring down two- or three-year averages? And especially highly visible stuff, like groceries. Thanksgiving dinner was actually cheaper in 2023 than in 2022. Will grocery prices be subdued enough to reduce the amount of complaining?Oh, and I’ll be looking at consumer sentiment, which as we’ve seen can be pretty disconnected from the economy but will matter for the election.Peter: Happy New Year!Source photographs by Caroline Purser and Anagramm/Getty ImagesThe Times is committed to publishing a diversity of letters to the editor. We’d like to hear what you think about this or any of our articles. Here are some tips. And here’s our email: letters@nytimes.com.Follow the New York Times Opinion section on Facebook, Instagram, TikTok, X and Threads. More

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      More Than Words: 10 Charts That Defined 2023

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      Some years are defined by a single event or person — a pandemic, a recession, an insurrection — while others are buffeted by a series of disparate forces. Such was 2023. The economy and inflation remained front of mind until the war in Gaza grabbed headlines and the world’s attention — all while Donald Trump’s […] More