Despite inflation, U.S. consumers are 5% better off than in 2019—here’s why they don’t feel that way
The public debate about inflation has caught on to what economists have long known: Price change—aka inflation—and prices are not the same thing. Though inflation has fallen back sharply over the last two years, prices have not dropped—they have merely risen more slowly. And while politicians promise lower prices on the campaign trail, the dirty little secret is that nobody wants prices to fall across the board. Falling prices constitute deflation, inflation’s ugly cousin.
So, are American voters stuck on a plateau of higher prices? Not quite. Wages matter just as much as prices. If the prices of all goods doubled in one year, consumers would face dire circumstances. But if wages also doubled, any financial injury would be largely psychological. What ultimately matters is price affordability—the ratio of prices and wages.
Price affordability in America
Since 2019, consumer prices are up nearly 20%, a painful surge after years of tame price growth in the pre-pandemic era. However, wages are up more than 25% over the same period. As a result, price affordability in aggregate is actually 5% better than it was in 2019.
At inflation’s crescendo in 2021-22, affordability slumped when wages did not keep pace. But since the middle of 2022, wages have been growing faster than prices. They’ve made up lost ground and are now inching ahead.
U.S. consumption data proves this point. While public discourse continues to paint U.S. consumers as cash-strapped and on the verge of folding, that narrative does not line up with the evidence. Total consumption has held up remarkably well despite gyrations in prices and wages, delivering strong growth and punting away persistent fears of recession. At an annualized pace of 2.9% in the second quarter, consumption is nowhere near recessionary conditions.
To reconcile the perception of consumer weakness with the fact of strong consumption we need to look inside consumers’ heads.
Consumers’ ability and willingness to spend are not the same but are often conflated. Today, the former remains quite strong, but after relentless price growth, the latter has become a matter of their perception of value for money.
The return of the $5 value meal in fast food restaurants is often touted as a sign of struggling consumers—but is it? During the pandemic, exploding grocery prices pushed consumers out of supermarkets and into fast-food restaurants where prices were rising more slowly. Over time, cumulative increases in fast-food prices eroded the relative value of dining out. Unsurprisingly, consumer demand has shifted back to groceries, where prices have leveled off. The return of the $5 value meal is a pitch to convince buyers to dine out again—offering value strategically where it once appeared organically.