Why aren’t people feeling better about the economy?

Americans should be feeling pretty good about their finances and the economy.
Stocks partly rebounded from last week’s selloff, which was largely triggered by a weak July jobs report, leaving the S&P 500 index 58% above its pre-pandemic level and total household wealth nearly 40% higher.
The 4.3% unemployment rate is historically low, despite last month’s rise.
And average wage growth has outpaced consumer price increases for more than a year, leaving households with more purchasing power than they had in 2019, before the onset of COVID-19 pandemic.
So why do they still feel so dreary?
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One word: Inflation.
Although a pandemic-induced price spike has slowed substantially, Americans remain preoccupied by  the cumulative rise in costs they’ve faced since the start of the health crisis, especially for essentials such as food and gas, economists say. And fresh data reveal that shoppers have become more price sensitive recently even as inflation has cooled, at least partly because their COVID-era savings have dwindled.
“The mere fact that (prices) are not going up anymore is not appeasing consumers,” especially the low- and middle-income people who have felt the brunt of rising costs, said Scott Hoyt, an economist at Moody’s Analytics. “They want to see them drop but that’s not happening.”
People’s views of inflation matter because they could affect their spending, which makes up 70% of economic activity and has slowed but remained sturdy so far. Their outlook also suggests Vice President Kamala Harris, in her race against Donald Trump for the White House, may be hurt by voters’ perceptions of the inflation run-up during President Biden’s administration while gaining limited benefit from the recent slowdown in price gains, Hoyt said.
Annual inflation has eased from a 40-year high of 9.1% in mid-2022 to 3% in June, according to the Labor Department’s consumer price index. The July CPI report, due out Wednesday, is expected to show overall inflation held steady at 3% in July but a core measure that excludes volatile food and energy items dipped to 3.2% from 3.3%.
Meanwhile, the closely watched consumer confidence index last month remained mired in the same middling range it has occupied the past two years, well below its buoyant pre-pandemic level.
“Even though consumers remain relatively positive about the labor market, they still appear to be concerned about elevated prices and interest rates,” Dana Peterson, chief economist of the Conference Board, said of the group’s July survey.
Americans do have more spending power. While inflation overall increased 22.6% from May 2019 to May 2024, average hourly earnings rose 25%, Labor Department figures show.
But they’re not necessarily feeling it.
“What is concerning consumers is the change in prices over the past few years,” Hoyt wrote in a report. “Aggregate retail prices are up a scant 0.1% over the last year. However, they are up 17.4% over the last five years,” compared to a 2.6% rise the previous five years.
What’s more, the essentials consumers have to buy regularly, such as gas and groceries, have jumped more than discretionary goods such as clothing and furniture, Hoyt’s analysis shows. During the five-year period, gas prices are up 29%; groceries, 24%; and restaurant meals (which Hoyt says some may consider a necessity following COVID lockdowns), 31%. Drugstore items have edged up modestly the past five years but rose a notable 2.2% the past year, Moody’s and Labor figures show.
Meanwhile, prices for appliances and electronics have fallen 19% since 2019 and the cost of cars, furniture and clothing has dropped the past year as COVID-related supply-chain snarls have resolved.
Yet instead of mollifying consumers, “In some ways, that makes it worse,” Hoyt says. “They say, ‘Why can’t food and the stuff I buy all the time come down just like those other things?’”
When prices shot up a couple of years ago, Lynn Gottlieb, of Seattle, switched from eating fish dinners five nights a week to two, substituting beans the other two nights. She also stopped dining out weekly, instead ordering takeout dinners once a month.
“Prices at restaurants have gone through the roof,” said Gottlieb, 72, a former information technology worker who retired two years ago.
And as airline fares jumped, she cut out biannual plane trips to places like Phoenix, San Francisco and New York.
Now that costs are more stable, Gottlieb has stepped up fish dinners to three times a week but she still doesn’t eat out.   
Although retail costs have moderated, Gottlieb says her property taxes – along with health, homeowners and auto insurance have soared – keeping her in frugal mode.
“I didn’t run out and change my life because some things aren’t changing,” she says.
Americans’ shopping patterns reflect a persistent price-sensitivity despite cooling inflation, a Bank of America report released last week shows. While the bank’s average credit and debit card transactions per household were up about 1% in July compared to a year ago, spending by dollar value was down 0.4%, according to Joe Wadford, an economist at the Bank of America Institute, which studies consumer behavior.
That – along with an analysis of where people are shopping – underscores that many consumers are switching from mainstream and premium stores to discount retailers, Wadford says. They’re also replacing brand-name goods with generic, store-branded items in their shopping carts, especially for groceries and clothing, Wadford said. And they’re forgoing full-service restaurant visits for fast food and other limited-service options.
“People are willing to trade down to get more stuff for less money,” he says.
Trading-down activity peaked along with inflation in 2022, according to a study by Morning Consult, a research and survey company, But it has been higher this year than in 2023 despite slowing price increases, Morning Consult said.
Wadford traced the trend to a sharp decline in pandemic savings that diminished the financial cushion households have used to cope with high inflation. Typical bank deposits are 40% above their pre-pandemic level but 23% below their peak in 2021, Bank of America Institute data shows.
The more than $2 trillion Americans socked away from stimulus checks and hunkering down at home during COVID restrictions has vanished, according to a study by the Federal Reserve Bank of San Francisco.
Trading down is especially prevalent among Generation Z (age 12-27) and millennials (age 28-43) as they move out or start families, Wadford said.
While the practice makes their dollar go further, it doesn’t necessarily make them feel better about inflation, Hoyt said.