Why Economists and Citizens Have Different Inflation Realities

is down to 3.3% from a high of nearly 9% in 2022. Despite the Fed’s “significant progress” in lowering inflation, most citizens are outraged and confused by economists’ relatively rosy inflation observations. Most citizens believe inflation is still rampant.

You know, I don’t think anyone knows, has a definitive answer why people are not as happy about the economy as they might be. -Jerome Powell 6/12/2024The graph below of the BLS CPI New Vehicles price index, a CPI component, demonstrates why economists and citizens have such grossly contrasting opinions of inflation.

Ask them again, but request the answer in dollars. It would not be surprising if many economists are off by a trillion or even two trillion dollars, representing anywhere from 3.00% to 7.00% of the economy. Consider the graph below. The blue line, showing the make-believe production of widgets, starts at 1,000 widgets and increases by 100 widgets annually. The steady growth in absolute terms is a linear upward trending line. However, the annual growth rate steadily declines from 10% to 4% by year 20. An economist looking at the graph would say the rate of the production of widgets is declining despite the upward trend in the number of widgets being produced annually.

That is significant inflation. But it doesn’t tell the whole story. If wages also rose similarly, purchasing power hasn’t changed. It is similar to hearing stories from your parents or grandparents about going to the movies and getting popcorn and a soda, all for $1. Did you ever ask them how much money they made at the time?We want to make it clear that we do not condone inflation. It accelerates an already wide wealth gap and creates hardships for many citizens.

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