
What Many Economists (and I) Got Wrong About This Economy
Plain English with Derek ThompsonTue Mar 05 2024
Cost of Living and Interest Rates Impact on Inflation:
- Official inflation measures do not properly capture the effect of higher interest rates, leading to a distorted view of the economy.
- Higher interest rates significantly impact monthly living costs for consumers, such as mortgage payments, car financing, and credit card debt.
- The exclusion of mortgage costs from the Consumer Price Index (CPI) since 1983 has made current inflation measures insensitive to interest rate changes.
- Rising interest rates have led to substantial increases in the cost of money for Americans, affecting their ability to afford big-ticket items like homes and cars.
Implications of Interest Rate Changes on Consumer Sentiment:
- Including interest rate costs into the CPI explains about 70% of the gap between hard economic data and consumer sentiment.
- Interest rates play a larger role in people's lives than previously thought, influencing how they perceive their cost of living.
- A decrease in interest rates could potentially boost consumer sentiment and positively impact how individuals view the economy.
- Economists predict that Federal Reserve Chair Jay Powell's decisions on interest rates could significantly influence voter opinions during elections.
Global Perspective on Economic Sentiment Discrepancy:
- The sentiment gap between measured inflation and actual consumer feelings is prevalent in multiple Western democracies.
- Countries with significant increases in interest rates also exhibit large sentiment gaps similar to those seen in the United States.
- Interest rate changes have a profound impact on consumer sentiment worldwide, indicating a broader phenomenon beyond American borders.