Even if prices fall, consumer spending will stay lowered

[Alicia, July 11, 2024, CNN Business, ‘Prices fell in June for the first time since the start of the pandemic’, , accessed July 14, 2024, CT]

Prices may not be rising as quickly as they have been, but that might not bring much solace to American households who see that the overall CPI is a good 20% higher than it was in February 2020. (In recent history, that index would typically rise about 10% over a 54-month period, BLS data shows).

The sticker shock of the past three years could leave a lasting impression on consumer behavior, said Michael Weber, an associate professor at the University of Chicago Booth School of Business who has studied how inflation surges affect consumer behavior.

“For many consumers, when we look at the price tags, walking down the aisles of the supermarket, that price tag compared to two, three years ago will be permanently higher, given the cumulative inflation we’ve witnessed over the last three years,” Weber told CNN in an interview.

“It’s ingrained in the memory,” he added.

The Fed closely monitors gauges of near-, medium- and long-term inflation expectations as those could be self-fulfilling prophecies for consumers: If people think prices will be higher in the future, they might spend more now or even demand higher wages. In turn, businesses faced with higher costs might end up raising prices as a result.

While Americans’ near-term inflation expectations have lessened, the fallout from high prices is being seen on a grander stage: The US presidential election.

“People aren’t economists, they don’t think like economists, they don’t look at the rate of change in consumer prices … they’re looking at how much a dozen eggs cost now compared to two years ago,” Bernard Yaros, lead US economist at Oxford Economics, told CNN. “This is really where I think Biden has gotten dinged by, in terms of his public image of his handling of the economy”.