Several of my recent posts expressed bewilderment that so many Americans have a negative view of the economy despite statistics that are overwhelmingly positive. The most common explanation is that people are angry because they compare the prices of homes, groceries, and other everyday items with those that prevailed a few years ago and see significant increases. While I understand their angst, the following chart places things in perspective:
Our recent bout of inflation has indeed been painful, but wages have actually increased at a faster rate than consumer prices, so people are better off. Since the onset of the pandemic, wages have grown at a 4.5% annual rate as compared to longer term average growth of about 2.5%. Where is the disconnect? Several days ago, Nobel Prize winner Paul Krugman published a piece that provided plausible answers to this conundrum. First, many people are skeptical of government inflation statistics believing that the prices of the things they buy have risen faster than the published Consumer Price Index figures. The second explanation is an interesting example of a psychological bias. Many people do not connect the growth of their wages and inflation; they view them as independent phenomena. Specifically, they believe they earned their wage increases but inflation came out of nowhere and snatched away those income gains. While I still believe the prevailing gloom is unjustified and irrational, I now have at least some understanding of the mindset of many consumers.