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.