WASHINGTON — Inflation has been called “the cruelest tax,” and that might understate how much people dislike it.
As President Biden has attempted to highlight positive developments about the economy, such as the creation of a record 6.4 million jobs last year, polls suggest many Americans aren’t listening. They’re more focused on rapidly rising prices, with the annual inflation rate soaring to its highest point in decades.
It’s no surprise that inflation has drowned out sunnier economic news touted by the Biden administration. Inflation holds a unique psychological power over Americans’ perception of the economy, overshadowing other economic indicators, polls and studies show. Sharply rising prices smack everyone in the face whenever they go to the grocery store or the gas station, and during their worst times, have proved to be a slayer of household budgets and presidential administrations.
The return of high inflation, which helped fuel the defeats of Gerald Ford and Jimmy Carter, poses a major political risk to Biden and the Democrats because it resonates so broadly with the public.
It’s a prospect that’s clearly gotten under the president’s skin. Biden, who has been tarred by Republicans for what they call “Bidenflation,” called a Fox News reporter a “stupid son of a b****” on a hot mic last week for asking whether he was worried that inflation would be a political liability for him. (Biden later apologized.)
“As long as inflation keeps rising faster than salaries, Americans are going to feel more pressured and more frustrated and, unless something changes, they’re going to take it out on Democrats in the midterms,” said Brad Bannon, who heads a political polling and consulting firm that works for Democratic candidates.
“If you ask Americans what they’re worried about, rising prices and inflation are right at the top of the list,” he said. “It’s a big problem, and the administration has to recognize it and talk about it and be much more aggressive.”
Biden administration officials spent much of last year downplaying price hikes as a temporary problem caused by supply chain bottlenecks after the pandemic shutdowns, echoing the view of the Federal Reserve and many economists. But prices kept rising, with the consumer price index increasing by 7 percent in the 12 months ending in December — the fastest rate since 1982.
In recent weeks, even as month-to-month price growth has slowed, Biden has begun to acknowledge consumers’ pain while also trying to emphasize positive news on jobs and economic growth to counterbalance inflation fears. But when prices are going up, it’s hard to convince Americans that other economic developments matter.
“Inflation, when it is substantial or shows the risk of becoming substantial, is clearly perceived as a national problem of enormous proportions,” Nobel Prize-winning Yale economist Robert Shiller wrote in an extensive study of inflation attitudes published in 1997.
He reported that the word “inflation” is the economic term most commonly used by the general public. And surveys his research assistants conducted in the United States, Germany, and Brazil found that most respondents “would choose low inflation even if it meant that millions more people would be unemployed.”
While high now, the annual inflation rate is well below the double-digit levels reached in the 1970s and early 1980s. That also was a time of stagnant economic growth, leading to a double whammy known as stagflation.
Slow economic growth is not a problem right now. The economy grew 5.7 percent last year, the fastest full-year pace since 1984. But some economists say that the government spending that helped fuel that higher growth, specifically the $1.9 trillion American Rescue Plan enacted last spring, also added to the inflation pressures caused by COVID and supply chain problems.
After decades of low annual inflation — in recent years often below 2 percent — the price hikes in 2021 have hit Americans hard, particularly after the cost of many products plummeted in 2020 when the economy shut down. Prices last year were up 50 percent for gas, 37 percent for used cars and trucks, and 13 percent for meat, poultry, fish, and eggs, government data show.
Although wages and salaries grew exceptionally well last year at 4.5 percent, they didn’t keep up with inflation. A Gallup Poll last month found that 49 percent of Americans said rising prices have caused hardship for their family, with 9 percent describing it as severe. In another poll Gallup released Wednesday, just one in three Americans said they were satisfied with the economy, down 10 percentage points from a year earlier and less than half the level before the pandemic hit.
“I think inflation is probably having the greatest influence in how they see the economy,” said Gallup senior editor Jeffrey M. Jones, who analyzes its polling data.
In the widely watched University of Michigan Surveys of Consumers last month, three-quarters of respondents said inflation was a more serious problem than unemployment, exceeding the readings in the 1970s when inflation was running much higher. Inflation concerns, along with worries about COVID, contributed to pushing the survey’s consumer sentiment index to its lowest level since 2011.
“Unemployment has a devastating impact on a very narrow segment of the economy . . . but inflation affects broadly across the population,” said Richard Curtin, the survey’s longtime chief economist. “It’s sort of a daily and weekly and monthly decision on what to cut back to leave room in your budget for food and gasoline and the other necessities of life. That is troublesome to consumers, especially when they do not see an end in sight.”
Expectations that prices will continue to rise can lead to a dangerous wage-price spiral, a phenomenon in which workers demand more pay to offset their fears of inflation, causing employers to raise prices, creating a self-fulfilling inflation prophecy. That’s what happened in the 1970s, but so far that trend does not appear to have reemerged.
In order to regain the public’s confidence, Biden needs to reassure Americans that he is on top of the inflation problem, said Adam S. Posen, president of the Peterson Institute for International Economics, a Washington think tank. That starts with acknowledging administration officials got it wrong last year when they said high inflation wouldn’t last very long and be realistic that it won’t get back down to normal for a while.
“The sense that was out there initially, fairly or not, was they were being dismissive of the inflation risks,” said Posen, a former member of the Bank of England’s monetary policy committee who was concerned last year about the size of the American Rescue Plan. “It’s less about saying, ‘Mea culpa, I messed up,’ although you have to start there. It’s more about putting out a realistic forecast about what’s going to happen over the next year or two.”
The Fed is expected to start slowly raising its rock-bottom benchmark interest rate in March as it tries the difficult task of slowing inflation without triggering a recession.
In recent weeks, Biden has been talking more about inflation — the pain it’s causing and the steps his administration is taking to fight it, including improving supply chains and targeting potential price gouging in noncompetitive markets, like meatpacking.
“Inflation is a problem . . . and it’s real and a lot of people are being hurt by it,” Biden said in Pittsburgh last week while pointing out that a big factor is the high cost of automobiles caused by semiconductor shortages that his administration is trying to address.
Bannon thinks Biden should take more aggressive stances, like calling out oil companies for their huge profits amid the gas price spikes.
“Inflation is something that Americans confront directly. It’s not an abstract economic concept,” Bannon said. “You have to acknowledge to Americans that you understand their pain and suffering. If you don’t, you pay the price.”