Price cuts will lift US vibes only so much

Money can't buy love, and when inflation soars it's harder to purchase a lot of other important things, too. The frustration is more pronounced for poorer shoppers than richer ones. Even as some companies start slashing prices to bring back customers, a $5 value meal and discounted T-shirt will hardly be enough to make Americans feel much better about the economy.

When The Beatles sang about the uselessness of currency when it comes to affairs of the heart, they started the refrain with "I don't care too much for money." It's a sentiment that feels even quainter 60 years after the band released the hit, even though those at the lower end of the income pyramid have had a better time of late.

Since 2019, the 25 percent of American workers with the lowest wages have been paid 5.4 percent more a year on average, compared with 3.8 percent raises for the country's top 25 percent of earners, according to Breakingviews calculations using 12-month rolling averages of monthly official data. The uplift is largely thanks to a booming US economy and low unemployment. Despite Wall Street's predictions of a recession, US output expanded by 2.5 percent last year, a pace that eclipsed all other advanced economies except Spain.

This year, economic growth is projected to accelerate even faster, according to the International Monetary Fund. Meanwhile, joblessness has dropped sharply from its nearly 15 percent peak during the onset of the pandemic in mid-2020, settling at or below 4 percent since January 2022.

Throw in Uncle Sam's fiscal largesse, which also benefited lower-income citizens, and it would be easy to conclude that those at the bottom are climbing the wealth ladder more quickly than before.
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It's not the pervasive mood, however. When the US Federal Reserve surveyed, families with annual incomes below $25,000 last October and asked if changes in prices from a year earlier had made their financial situations worse, 96 percent said yes. Among those earning more than $100,000, only 69 percent agreed.

The country's strong economic showing compared to the gaps in sentiment are confounding economists and politicians alike. Whatever the reasons, however, the problem will be a significant factor when voters go to the ballot box in November to choose the next US president. Making sense of the numbers also is important when deciding where to guide fiscal and monetary policy.
One possible explanation for the discrepancy between wage growth and the nagging financial anxiety is that perceptions are worse than the reality. This would be a variation on the "vibecession", neologism coined by economic analyst Kyla Scanlon. There's more persuasive evidence, however.

The bad vibes are justified by the price spikes, which were partly fueled by the vast sums pumped into the economy by Congress and President Joe Biden. "If you were to design a tax that hits the lowest strata of the population the most, you would pick the kind of inflation we just had," says a former Fed policymaker.

Data supports the intuition, too. Consumers of all income levels are paying 23 percent more for goods and services as in 2019. Poorer households have had it worse than the average American, however, for two reasons.

The first is that they bought items that were vastly more expensive than the average increase. Lower-income consumers tend to spend a bigger proportion of their income on rent, which soared by 6 percent and 8 percent in 2022 and 2023, respectively, from the previous years. These same households also use about a third of their income to buy food, from both supermarkets and restaurants. Those two categories hiked prices by more than 11 percent and nearly 8 percent in 2022 alone. By comparison, richer Americans devote just 8 percent of their incomes to food, according to the US Department of Agriculture.

There have been attempts to understand the differences more broadly. The average consumer encountered annual inflation of 4.5 percent from 2019 onwards, but the bottom fifth of the income scale paid a bit more, while those in the top fifth endured slightly lower increases, the

Congressional Budget Office estimated, after studying a typical consumption basket. Despite the narrow gaps, a separate study, by University of Pennsylvania researchers found that the bottom 20 percent spent $2,100 more in 2021 for the same products as in 2019, an amount that significantly skews household finances at that level.

These effects have been compounded by poorer households experiencing smaller income rises than their richer counterparts, despite faster wage growth. The shortfall comes from a comparative lack of dividends and other investment sources. Poorer consumers are now cutting back wherever possible. Between 2020 and 2021, the lowest quintile increased spending on food by nearly 19 percent, according to official figures. A year later, the growth rate had plunged to less than 5 percent.

Retailers and eateries are trying to lure back customers, too. Target, for one, recently discounted 5,000 popular items, including staples like milk and coffee. McDonald's is rolling out, a temporary $5 value meal. Amazon.com , Walmart and Walgreens are also offering markdowns, indicating a tipping point.

"We know consumers are feeling pressured to make the most of their budget," Target executive Rick Gomez said.

Moreover, some of the reductions reflect a reversal of "greedflation," when companies use inflationary times to fatten their bottom lines by jacking up prices faster than their own costs. Fresh discounts may bring some relief to lower-income households, but are unlikely to make much difference to their overall financial health or change the economic "vibes."

A more lasting answer only will come when broader inflation falls. In that respect, the signs are mixed. For the first time since 2020, more than half of 74 components in the consumer price index are growing at less than 2 percent, according to BofA analysts. At the same time, the Fed's preferred price measure increased at an annual rate of 2.7 percent in April, the same pace as in March. And while it's well below the June 2022 peak, it is higher than the central bank's roughly 2 percent target. Its rate-setting committee has repeatedly said it would keep borrowing costs elevated to fight sticky inflation.

The roots of US wealth inequality are deep and complex, but until the most regressive tax of all – high prices – recedes, it will be difficult to tackle them properly. It's all well and good to "want the kind of things that money just can't buy," as Paul McCartney and John Lennon imagined. The economic realities are less romantic.

Source: Reuters, London