Inflation has returned to American life, and it’s hitting us hard. Take your pick of aggravating factors: the U.S. and Israeli war on Iran is perhaps the most glaring, but even that intersects with and exacerbates the problems wrought by, among other things, chaotic tariff policies, the climate crisis, and the AI boom’s titanic energy consumption. As TCF and Protect Borrowers have been demonstrating, the result is higher prices and cost of living across the board, from utilities to groceries, and consumer debt rates that are spiraling out of control.
These trends can be tracked on the more traditional economic indicators as well. The annual inflation rate of the Consumer Price Index (CPI) was 3.5 percent in June 2026, up from a post-pandemic low of 2.3 percent in April 2025. Moreover, real hourly wages—that is, wages adjusted for inflation—appear to be falling for the first time in over a year. Quite simply, Americans can buy less with their take-home pay than they could just a few months ago. Yet, as gloomy as this sounds, things may already be worse than they seem.
The recent decline in real wages contrasts sharply with the narrative about the economy since the COVID-19 pandemic began to wind down, which has been largely positive. Even though prices spiked after the pandemic, the data surprisingly suggested that real wages rose across the board, with particularly strong growth for low-wage workers. This implies that, despite rapidly rising prices, workers were actually left even better off than before the pandemic thanks to more rapid increases in wages. If true, this should have provided Americans with a buffer against today’s price surges.
However, my research finds that those supposed real wage gains were likely a statistical illusion for many Americans. Instead, the reality is that costs of living may have already been outpacing incomes for many Americans for quite some time. The current surge in prices is only exacerbating the cost-of-living crisis that has already been plaguing the country.
My research finds that those supposed real wage gains were likely a statistical illusion for many Americans. Instead, the reality is that costs of living may have already been outpacing incomes for many Americans for quite some time.
This has been obvious to many Americans all along, and policymakers’ insistence to the contrary has been a major factor in the breach in trust between government and the public. In this commentary, we’ll explore why policymakers can be misled by the traditional economic indicators and demonstrate how the experiences reported by working Americans can be an important and reliable source of data after all.
Why “Real Wages” Are Misleading
Why might data indicating a rise in real wages during the pandemic end up failing to capture the economic insecurity facing so many Americans?
In simple terms, “real wages” are measured by dividing wages by inflation. Comparing real wages from one period to another is supposed to reflect how changes in hourly wages compare to changes in the prices of the goods and services Americans regularly purchase. If real wages rise, this indicates that the purchasing power of an hour’s work has risen—that is, a greater quantity of goods and services can be purchased from hourly earnings. Hence, even if there is high inflation—as occurred in the wake of the COVID-19 pandemic—an increase in real wages suggests that Americans should not only be able to keep up with rising living costs, but should even have extra money left over after paying for them.
But how should we understand “inflation” in such a broadly defined context? There are millions of different goods and services with prices moving in various directions and magnitudes at any moment in time. Yet, when measuring real wages, “inflation” is boiled down to a single number. This single number is supposed to reflect the changing costs of an average American’s regular purchases, including food, housing, medical care, and so on.
However, reducing inflation down to a single number hides the fact that, in reality, every American experiences radically different changes in their day-to-day costs of living. This means the inflation rate doesn’t actually represent anyone’s experience in any meaningful way. For example, some people rent, while others own their homes. If our measure of inflation averages together the changing costs of housing for renters and homeowners, then this measure does not actually reflect the housing costs of either group.
This is just one simple example, but it applies to every kind of expenditure—some people eat meat, while others are vegetarians; some drive to work, while others rely on public transportation; some spend some of their money on recreational boats and fancy jewelry—the prices of which are included in the CPI—while others cannot afford to do so; and so on. Consequently, the average “consumption basket” used to determine the CPI, the most-cited measure of these trends, does not actually reflect the items regularly purchased by any given American.
Moreover, even if every American regularly purchased the exact same list of goods and services, there is another important source of variation in the inflation experienced by each person: everyone frequents different stores, lives in different locations, and tends to buy items of varying quality. For example, some people might regularly buy expensive organic chicken at Whole Foods, while others might tend to buy the cheapest cut at Aldi. Those two individuals can face wildly different percent changes in the prices of the chicken that they regularly consume. Yet inflation indexes such as the CPI assume that everyone faces the same exact percent change in the price of the chicken they buy. Again, this is a simple example, but it applies to every single type of expenditure. And, in fact, studies have found that the prices of the cheapest-quality goods—on which the lowest-income Americans depend—rose at faster rates than the prices of more expensive goods during the inflation we’ve experienced over the past five years.
When we erroneously assume both that everyone buys the same list of items, and that everyone faces the same price changes for each of those items, we end up with a measure of inflation that represents the experience of no actually existing household.
As a result, when we erroneously assume both that everyone buys the same list of items, and that everyone faces the same price changes for each of those items, we end up with a measure of inflation that represents the experience of no actually existing household. The majority of Americans can face changes in their day-to-day costs of living that bear little resemblance to what the official inflation metric indicates. And, consequently, when we use that single number of inflation to calculate real wages, we end up with a metric that does not actually reflect whether wages have outpaced the costs of living for any actually existing worker.
The Evidence: Food Purchasing Power
Food is an excellent place to examine these effects on purchasing power. In a new working paper, I demonstrate the extent of this problem. Using a data set that tracks the exact purchases and prices paid by a representative sample of American households, I find that there is a large degree of variation in the food inflation experienced by households in any given period. For example, even when average food inflation was near zero in the third quarter of 2019, one quarter of U.S. households experienced food inflation rates below –3 percent, while another quarter experienced rates above 4 percent.
Moreover, when inflation rises, the range in food inflation rates across households widens even further. This means that it is precisely during periods of high inflation, like the post-pandemic period, that a single price index such as the CPI becomes even less representative of the actual inflation experiences of the broader population. In the fourth quarter of 2022, for example, less than one-quarter of U.S. households experienced food inflation rates within 2 percentage points of the official metric of 12 percent. Instead, a large majority experienced higher food inflation rates than the official metric suggested, with more than one-quarter of households facing rates above 22 percent. In other words, if a family of four paid around $850 per month for groceries towards the end of 2021, the official food inflation measure suggests the same basket of groceries would cost around $952 towards the end of 2022. By contrast, I find that one-quarter of households would have paid more than $1,037 given the food inflation they actually experienced. These differences between the official indexes and actual household experiences furthermore accumulate month over month. And in fact, I find that lower-income households tended to face higher food inflation rates than higher-income households throughout the post-pandemic period.
Figure 1
Figure 2
The variation in household inflation experiences has important implications for measurements of food purchasing power. For example, if we use the official food inflation metric as our measure of inflation, we would conclude that the food purchasing power of low-wage workers rose by 8 percent between the start of the pandemic and the end of 2023, without ever having dipped below its pre-pandemic level. But when we instead use the average food inflation rate based on the actual purchases and prices paid by low-income households, we would instead conclude that food purchasing power in fact dipped below pre-pandemic levels during the inflationary spike—reflecting a period of financial hardship—and only ended 2 percent higher by the end of 2023.
Moreover, if we instead look at the food purchasing power of after-tax annual household incomes—which not only accounts for incomes earned from wages but also accounts for hours worked, taxes, and transfer payments—we would conclude that food purchasing power for low-income households declined by a whopping 11 percent between 2019 and 2023. This effectively means that, on average, low-income households would either need to devote a larger portion of their income to pay for their groceries—with less left over for everything else, whose costs also went up—or make cuts to their grocery shopping.
Figure 3
Contrary to the picture gleaned from the traditional real wage metrics, a large portion of low-wage workers and a large majority of low-income households were forced to either cut back on their grocery shopping or make cuts to their other expenditures by the end of the pandemic.
Finally, and more importantly, using a single number for our measure of food inflation—even one that better reflects the actual inflation experienced by households—still hides the reality that there is a high degree of variation in the food inflation experienced within low-income populations. When we instead take into account this variation, we find that the food purchasing power of the hourly wage declined for nearly half of low-wage workers between the start of the pandemic and the end of 2023, and that of annual household incomes fell by more than 11 percent for a majority of low-income households. Hence, contrary to the picture gleaned from the traditional real wage metrics, a large portion of low-wage workers and a large majority of low-income households were forced to either cut back on their grocery shopping or make cuts to their other expenditures by the end of the pandemic. And while my analysis was limited to food purchasing power due to data limitations, the argument applies broadly: the variation in consumption habits, stores frequented, and so on, implies there exists wide variation in household experiences of inflation—and, therefore, purchasing power—across expenditure categories. This variation is masked in official real wage indicators.
Why It Matters: Tracking Americans’ Economic Well-Being
The above analysis makes it clear: if we want to measure the actual conditions American workers are facing, we need to look at things in another way. Those same workers have been offering other perspectives all along. While the official statistics suggested American workers—especially low-wage workers—were left better off after the pandemic despite skyrocketing prices, the American public was itself reporting rising financial duress and persistently low consumer sentiments in survey after survey.
Rather than listening to what Americans were saying, many experts and pundits chose to believe the data were undoubtedly correct. Public pessimism regarding the economy was therefore often attributed to psychological factors, such as a strong dislike of inflation, falling prey to sensationalist media coverage, and political bias. In other words, Americans were simply not smart enough to understand that their incomes were actually rising faster than prices, and that their material conditions were improving. The disconnect between the data and public perceptions was labeled the “vibecession”—not an actual recession or decline in economic well-being, but merely a mistaken case of “bad vibes.” It was therefore a shock when Americans chose not to reelect the president that had delivered such an allegedly strong economy.
Yet as the analysis above suggests, the “bad vibes” were likely a reflection of real and measurable suffering. This makes it easier to see why much of the public interpreted the bragging over the “strong” post-pandemic economy and the “vibecession” discourse as nothing but condescension and dismissiveness. If the actual material realities facing American households were not reflected at all in traditional real wage measures, that’s the economists’ problem, not the public’s. In fact, the possibility that Americans’ material conditions were not as rosy as such measures suggested was conspicuously reflected in troubling signs of declining economic security, such as rising food insecurity, housing insecurity, and debt delinquency, and more.
Why is it that indices relied on so widely for their rigor can be so off the mark? If the material conditions of the broader population—particularly low-wage workers—were truly improving, it is difficult to reconcile the simultaneous rise in indicators of financial stress that disproportionately burden low-income populations. But this apparent paradox becomes less surprising when we consider the fact that inflation indexes like the CPI—and real wage measures that rely on them—represent no actually existing household. In reality, everyone faces vastly different changes in their day-to-day costs of living, but this variation is hidden when we boil inflation down to a single number. Consequently, rising costs of living can outpace changes in incomes for many, or even a majority, of Americans when traditional real wage measures suggest the opposite.
However, we need not throw out the baby with the bathwater: we simply need to recalibrate. Traditional real wage measures should not be wholly relied upon as accurate indicators of economic well-being for the broader population, especially during times of high inflation. Instead, it would serve experts, pundits, and policy makers to think twice before dismissing public sentiments that diverge from what the data suggest, and to take a more holistic approach when assessing Americans’ financial positions. These actors already have a pressing opportunity to avoid repeating the mistake. In the present moment, for example, consumer sentiment hit historic lows in May 2026 at the same time while the stock market continues to climb to new record highs. Given that today’s inflation is particularly driven by rising prices for food and energy, which disproportionately impact lower-income Americans, it seems imprudent to assume that pessimistic public perceptions are once again a mistaken case of “bad vibes.”
Moreover, the analysis in this commentary calls into question the benefits of the U.S. government’s policy response to the pandemic-fueled inflation. When price pressures first appeared in 2021, the government first took a “wait-and-see” approach, letting prices rise while essentially doing nothing about it. Then, when CPI inflation rose to highs not seen since the 1970s, the Fed began aggressively raising interest rates to “cool” the economy—i.e. to lower total demand by causing unemployment. If it was truly the case that, after all of this, Americans were left better off than before the pandemic-fueled inflation, then perhaps the Fed’s policy response was not problematic. After all, inflation fell without a significant spike in unemployment, and tight labor markets allegedly delivered material gains for workers!
Simply waiting and allowing price pressures from supply shocks to ripple through supply chains and generate economy-wide inflation is unacceptable if this leads to material losses for most Americans.
But if, in reality, many or even a majority of workers and households actually saw their rising costs of living outpace their change in incomes—and if this was hidden by the traditional real wage data—then this demonstrates how misguided were both the initial “wait-and-see” approach as well as the Fed’s subsequent interest rate hikes. Simply waiting and allowing price pressures from supply shocks to ripple through supply chains and generate economy-wide inflation is unacceptable if this leads to material losses for most Americans.
Fortunately, contrary to contemporary wisdom, the U.S. government is not powerless in this regard. In the past, governments around the world—including the U.S. government—have successfully used tools such as buffer stocks, strategic price controls, and supply-side tools to expand supply where shortages exist to prevent inflationary impulses from rippling into broader inflation. These tools should be revived today. Second, since the purpose of raising interest rates is to reduce total demand by causing unemployment, and if living costs were actually rising faster than incomes, then workers not only suffered from inflation in the first place, but were also targets of the “solution.” Instead, we need a new policy toolkit to combat inflation fueled by supply shocks that does not aim to materially harm workers by design. Those workers should have been analysts’ bellwether all along.
Tags: standard of living, cost of living, affordability crisis
Remember the “Vibecession”? It Turns Out, People Were Right.
Inflation has returned to American life, and it’s hitting us hard. Take your pick of aggravating factors: the U.S. and Israeli war on Iran is perhaps the most glaring, but even that intersects with and exacerbates the problems wrought by, among other things, chaotic tariff policies, the climate crisis, and the AI boom’s titanic energy consumption. As TCF and Protect Borrowers have been demonstrating, the result is higher prices and cost of living across the board, from utilities to groceries, and consumer debt rates that are spiraling out of control.
These trends can be tracked on the more traditional economic indicators as well. The annual inflation rate of the Consumer Price Index (CPI) was 3.5 percent in June 2026, up from a post-pandemic low of 2.3 percent in April 2025. Moreover, real hourly wages—that is, wages adjusted for inflation—appear to be falling for the first time in over a year. Quite simply, Americans can buy less with their take-home pay than they could just a few months ago. Yet, as gloomy as this sounds, things may already be worse than they seem.
The recent decline in real wages contrasts sharply with the narrative about the economy since the COVID-19 pandemic began to wind down, which has been largely positive. Even though prices spiked after the pandemic, the data surprisingly suggested that real wages rose across the board, with particularly strong growth for low-wage workers. This implies that, despite rapidly rising prices, workers were actually left even better off than before the pandemic thanks to more rapid increases in wages. If true, this should have provided Americans with a buffer against today’s price surges.
However, my research finds that those supposed real wage gains were likely a statistical illusion for many Americans. Instead, the reality is that costs of living may have already been outpacing incomes for many Americans for quite some time. The current surge in prices is only exacerbating the cost-of-living crisis that has already been plaguing the country.
This has been obvious to many Americans all along, and policymakers’ insistence to the contrary has been a major factor in the breach in trust between government and the public. In this commentary, we’ll explore why policymakers can be misled by the traditional economic indicators and demonstrate how the experiences reported by working Americans can be an important and reliable source of data after all.
Why “Real Wages” Are Misleading
Why might data indicating a rise in real wages during the pandemic end up failing to capture the economic insecurity facing so many Americans?
In simple terms, “real wages” are measured by dividing wages by inflation. Comparing real wages from one period to another is supposed to reflect how changes in hourly wages compare to changes in the prices of the goods and services Americans regularly purchase. If real wages rise, this indicates that the purchasing power of an hour’s work has risen—that is, a greater quantity of goods and services can be purchased from hourly earnings. Hence, even if there is high inflation—as occurred in the wake of the COVID-19 pandemic—an increase in real wages suggests that Americans should not only be able to keep up with rising living costs, but should even have extra money left over after paying for them.
But how should we understand “inflation” in such a broadly defined context? There are millions of different goods and services with prices moving in various directions and magnitudes at any moment in time. Yet, when measuring real wages, “inflation” is boiled down to a single number. This single number is supposed to reflect the changing costs of an average American’s regular purchases, including food, housing, medical care, and so on.
However, reducing inflation down to a single number hides the fact that, in reality, every American experiences radically different changes in their day-to-day costs of living. This means the inflation rate doesn’t actually represent anyone’s experience in any meaningful way. For example, some people rent, while others own their homes. If our measure of inflation averages together the changing costs of housing for renters and homeowners, then this measure does not actually reflect the housing costs of either group.
This is just one simple example, but it applies to every kind of expenditure—some people eat meat, while others are vegetarians; some drive to work, while others rely on public transportation; some spend some of their money on recreational boats and fancy jewelry—the prices of which are included in the CPI—while others cannot afford to do so; and so on. Consequently, the average “consumption basket” used to determine the CPI, the most-cited measure of these trends, does not actually reflect the items regularly purchased by any given American.
Moreover, even if every American regularly purchased the exact same list of goods and services, there is another important source of variation in the inflation experienced by each person: everyone frequents different stores, lives in different locations, and tends to buy items of varying quality. For example, some people might regularly buy expensive organic chicken at Whole Foods, while others might tend to buy the cheapest cut at Aldi. Those two individuals can face wildly different percent changes in the prices of the chicken that they regularly consume. Yet inflation indexes such as the CPI assume that everyone faces the same exact percent change in the price of the chicken they buy. Again, this is a simple example, but it applies to every single type of expenditure. And, in fact, studies have found that the prices of the cheapest-quality goods—on which the lowest-income Americans depend—rose at faster rates than the prices of more expensive goods during the inflation we’ve experienced over the past five years.
As a result, when we erroneously assume both that everyone buys the same list of items, and that everyone faces the same price changes for each of those items, we end up with a measure of inflation that represents the experience of no actually existing household. The majority of Americans can face changes in their day-to-day costs of living that bear little resemblance to what the official inflation metric indicates. And, consequently, when we use that single number of inflation to calculate real wages, we end up with a metric that does not actually reflect whether wages have outpaced the costs of living for any actually existing worker.
The Evidence: Food Purchasing Power
Food is an excellent place to examine these effects on purchasing power. In a new working paper, I demonstrate the extent of this problem.1 Using a data set that tracks the exact purchases and prices paid by a representative sample of American households,2 I find that there is a large degree of variation in the food inflation experienced by households in any given period. For example, even when average food inflation was near zero in the third quarter of 2019, one quarter of U.S. households experienced food inflation rates below –3 percent, while another quarter experienced rates above 4 percent.
Moreover, when inflation rises, the range in food inflation rates across households widens even further. This means that it is precisely during periods of high inflation, like the post-pandemic period, that a single price index such as the CPI becomes even less representative of the actual inflation experiences of the broader population. In the fourth quarter of 2022, for example, less than one-quarter of U.S. households experienced food inflation rates within 2 percentage points of the official metric of 12 percent. Instead, a large majority experienced higher food inflation rates than the official metric suggested, with more than one-quarter of households facing rates above 22 percent. In other words, if a family of four paid around $850 per month for groceries towards the end of 2021,3 the official food inflation measure suggests the same basket of groceries would cost around $952 towards the end of 2022. By contrast, I find that one-quarter of households would have paid more than $1,037 given the food inflation they actually experienced. These differences between the official indexes and actual household experiences furthermore accumulate month over month. And in fact, I find that lower-income households tended to face higher food inflation rates than higher-income households throughout the post-pandemic period.
Figure 1
Figure 2
The variation in household inflation experiences has important implications for measurements of food purchasing power. For example, if we use the official food inflation metric as our measure of inflation, we would conclude that the food purchasing power of low-wage workers4 rose by 8 percent between the start of the pandemic and the end of 2023, without ever having dipped below its pre-pandemic level. But when we instead use the average food inflation rate based on the actual purchases and prices paid by low-income households, we would instead conclude that food purchasing power in fact dipped below pre-pandemic levels during the inflationary spike—reflecting a period of financial hardship—and only ended 2 percent higher by the end of 2023.
Moreover, if we instead look at the food purchasing power of after-tax annual household incomes—which not only accounts for incomes earned from wages but also accounts for hours worked, taxes, and transfer payments—we would conclude that food purchasing power for low-income households5 declined by a whopping 11 percent between 2019 and 2023. This effectively means that, on average, low-income households would either need to devote a larger portion of their income to pay for their groceries—with less left over for everything else, whose costs also went up—or make cuts to their grocery shopping.
Figure 3
Finally, and more importantly, using a single number for our measure of food inflation—even one that better reflects the actual inflation experienced by households—still hides the reality that there is a high degree of variation in the food inflation experienced within low-income populations. When we instead take into account this variation, we find that the food purchasing power of the hourly wage declined for nearly half of low-wage workers between the start of the pandemic and the end of 2023, and that of annual household incomes fell by more than 11 percent for a majority of low-income households.6 Hence, contrary to the picture gleaned from the traditional real wage metrics, a large portion of low-wage workers and a large majority of low-income households were forced to either cut back on their grocery shopping or make cuts to their other expenditures by the end of the pandemic. And while my analysis was limited to food purchasing power due to data limitations, the argument applies broadly: the variation in consumption habits, stores frequented, and so on, implies there exists wide variation in household experiences of inflation—and, therefore, purchasing power—across expenditure categories. This variation is masked in official real wage indicators.
Why It Matters: Tracking Americans’ Economic Well-Being
The above analysis makes it clear: if we want to measure the actual conditions American workers are facing, we need to look at things in another way. Those same workers have been offering other perspectives all along. While the official statistics suggested American workers—especially low-wage workers—were left better off after the pandemic despite skyrocketing prices, the American public was itself reporting rising financial duress and persistently low consumer sentiments in survey after survey.
Rather than listening to what Americans were saying, many experts and pundits chose to believe the data were undoubtedly correct. Public pessimism regarding the economy was therefore often attributed to psychological factors, such as a strong dislike of inflation, falling prey to sensationalist media coverage, and political bias. In other words, Americans were simply not smart enough to understand that their incomes were actually rising faster than prices, and that their material conditions were improving. The disconnect between the data and public perceptions was labeled the “vibecession”—not an actual recession or decline in economic well-being, but merely a mistaken case of “bad vibes.” It was therefore a shock when Americans chose not to reelect the president that had delivered such an allegedly strong economy.
Yet as the analysis above suggests, the “bad vibes” were likely a reflection of real and measurable suffering. This makes it easier to see why much of the public interpreted the bragging over the “strong” post-pandemic economy and the “vibecession” discourse as nothing but condescension and dismissiveness. If the actual material realities facing American households were not reflected at all in traditional real wage measures, that’s the economists’ problem, not the public’s. In fact, the possibility that Americans’ material conditions were not as rosy as such measures suggested was conspicuously reflected in troubling signs of declining economic security, such as rising food insecurity, housing insecurity, and debt delinquency, and more.
Why is it that indices relied on so widely for their rigor can be so off the mark? If the material conditions of the broader population—particularly low-wage workers—were truly improving, it is difficult to reconcile the simultaneous rise in indicators of financial stress that disproportionately burden low-income populations. But this apparent paradox becomes less surprising when we consider the fact that inflation indexes like the CPI—and real wage measures that rely on them—represent no actually existing household. In reality, everyone faces vastly different changes in their day-to-day costs of living, but this variation is hidden when we boil inflation down to a single number. Consequently, rising costs of living can outpace changes in incomes for many, or even a majority, of Americans when traditional real wage measures suggest the opposite.
However, we need not throw out the baby with the bathwater: we simply need to recalibrate. Traditional real wage measures should not be wholly relied upon as accurate indicators of economic well-being for the broader population, especially during times of high inflation. Instead, it would serve experts, pundits, and policy makers to think twice before dismissing public sentiments that diverge from what the data suggest, and to take a more holistic approach when assessing Americans’ financial positions. These actors already have a pressing opportunity to avoid repeating the mistake. In the present moment, for example, consumer sentiment hit historic lows in May 2026 at the same time while the stock market continues to climb to new record highs. Given that today’s inflation is particularly driven by rising prices for food and energy, which disproportionately impact lower-income Americans, it seems imprudent to assume that pessimistic public perceptions are once again a mistaken case of “bad vibes.”
Moreover, the analysis in this commentary calls into question the benefits of the U.S. government’s policy response to the pandemic-fueled inflation. When price pressures first appeared in 2021, the government first took a “wait-and-see” approach, letting prices rise while essentially doing nothing about it. Then, when CPI inflation rose to highs not seen since the 1970s, the Fed began aggressively raising interest rates to “cool” the economy—i.e. to lower total demand by causing unemployment. If it was truly the case that, after all of this, Americans were left better off than before the pandemic-fueled inflation, then perhaps the Fed’s policy response was not problematic. After all, inflation fell without a significant spike in unemployment, and tight labor markets allegedly delivered material gains for workers!
But if, in reality, many or even a majority of workers and households actually saw their rising costs of living outpace their change in incomes—and if this was hidden by the traditional real wage data—then this demonstrates how misguided were both the initial “wait-and-see” approach as well as the Fed’s subsequent interest rate hikes. Simply waiting and allowing price pressures from supply shocks to ripple through supply chains and generate economy-wide inflation is unacceptable if this leads to material losses for most Americans.
Fortunately, contrary to contemporary wisdom, the U.S. government is not powerless in this regard. In the past, governments around the world—including the U.S. government—have successfully used tools such as buffer stocks, strategic price controls, and supply-side tools to expand supply where shortages exist to prevent inflationary impulses from rippling into broader inflation. These tools should be revived today. Second, since the purpose of raising interest rates is to reduce total demand by causing unemployment, and if living costs were actually rising faster than incomes, then workers not only suffered from inflation in the first place, but were also targets of the “solution.” Instead, we need a new policy toolkit to combat inflation fueled by supply shocks that does not aim to materially harm workers by design. Those workers should have been analysts’ bellwether all along.
Notes
Tags: standard of living, cost of living, affordability crisis