Despite positive economic signs, inflation is still contributing to higher prices for families and businesses.
Despite high interest rates and stubborn inflation, the economy is growing remarkably well. All the major indicators we use to gauge its health—and how families and businesses are faring—are strongly positive:
Wages are growing close to 4% on an annual basis, which is above the rate of inflation.
The unemployment rate is low, at 3.9%.
Consumer spending was up in March (the latest available data).
On the business side, business investment is rising.
Furthermore, the economy grew almost 3% in 2023. As of this writing, the Atlanta Federal Reserve’s real-time tracker of economic growth estimates 4.2% growth for the second quarter of 2024.
However, despite all this positive data, many Americans do not believe the economy is doing well.
Why it matters: Consumer sentiment plummeted in May, dropping from April when it was already low to begin with. It is lower now than it was in March 2020.
Small business optimism is at its lowest level since 2012. Manufacturers and service providers’ optimism says both sectors are in recession. According to the MetLife and U.S. Chamber Small Business Index, inflation has been the overwhelming top concern among small business owners for nearly two years.
Inflation’s role: The key data point that ties together these seemingly irreconcilable viewpoints is inflation. It’s still too high, and it’s making everyone feel the economy is in worse shape than it is.
- For families, it makes them feel as though they can’t get ahead. They are earning enough to keep up with day-to-day expenses, but they can’t save for the future, like their kids’ education or their own retirements.
- For businesses, rising wages, particularly for small businesses, are putting tremendous strain on profit margins. Every time a business hires a new worker, they are paying them more than they paid their last hires. That means they now need to bump up the pay of those recent hires, as well as existing employees, to maintain an equitable pay scale. So, their wage bill rises considerably with each badly needed worker they bring on.
Businesses find it harder to pass higher costs on to customers because they are tired of rising prices and are less willing to pay them. This is squeezing businesses’ bottom lines.
Feelings about the economy would improve, as would businesses’ margins, if inflation would come down further. That will happen—eventually.
Inflation is still above the Fed’s 2% target. At last reading it was 3.4%. That is much lower than the 9% peak in 2022, but still too high. It is going to take a few more years before we finally get inflation down to 2%, based on the Fed’s own projections.
In the meantime, inflation will continue to be at the front of people’s minds in large part because prices are still rising.