Americans Are Fed Up With High Prices, But Deflation Comes With Its Own Risks

The weight of skyrocketing food costs is a hardship on kitchen tables across the United States. Furniture tags make holiday customers cringe, even if they used to ignore them. Wages may be on the up, but they aren’t keeping up with the skyrocketing cost of living.

New data from Morning Consult shows that consumers would prefer to see price reductions than income increases by nearly double the margin. It’s astonishing evidence, but it also speaks to a real sense of annoyance.

Consumers really do dislike high prices: They would rather prices go down than their wages go up, according to our data.

The share of consumers who would prefer that…

Personal income goes up: 37%
Prices go down: 63% https://t.co/iHMvMrCNua pic.twitter.com/9S9WZ5OBuk

— Morning Consult (@MorningConsult) December 1, 2023

Wage increases may make sense in principle, but the sticker shock that people are experiencing right now is undeniable.

Since the pandemic began, some typical grocery bills have increased by 25%. Years of small raises have been practically nullified in an instant. Paycheck to paycheck is the reality for more than 75% of Americans.

The status quo was never sustainable to begin with, and now families’ budgets are in jeopardy due to the painful squeeze of inflation.

It’s understandable that a lot of people in the United States are seeking relief. Economists, nevertheless, caution against getting your hopes up.

What Deflation Would Mean for the Broader Economy

A key detail regarding inflation is frequently disregarded in these debates: While it’s true that rising inflation gradually reduces consumers’ buying power, the alternative is considerably worse. Deflation, defined as persistently declining prices, brings about a plethora of broader economic problems.

“I don’t think people remember how bad recessions are,” stated Sofia Baig, an economist from Morning Consult who wrote the latest study on inflation. For a long period, we did not experience a severe economic downturn.

It is possible that members of Generation Z and the younger generation of millennials have never worked through a recession.

According to Baig’s findings, the correlation between deflation and economic crises is much less prominent in the minds of ordinary consumers.

A third of people who took the survey were still in favor of price cuts after hearing that doing so would almost certainly trigger a recession, according to a follow-up question. With all that has happened, cheaper prices for necessities like food are certainly sounding good.

Deflation, on the other hand, poses a greater macro-level hazard of slashing consumer expenditure. When prices are falling steadily, consumers just quit buying.

There will almost probably be a better and cheaper TV on the market next year, so why buy one now? When greater deals are appearing every week, why not stock up now? It’s disastrous for long-term growth and the pinnacle of frugality’s paradoxes.

The reverberation of job losses is also getting worse. Businesses often lay off workers when consumer purchasing suddenly decreases.

As a consequence, consumers’ spending power drops even further, forcing more businesses to cut jobs, including restaurants, stores, and manufacturing. It’s a vicious cycle that becomes worse during economic downturns.

Deflation-Driven Recessions are Uniquely Difficult to Recover From

When it comes to deflationary catastrophes, none are more famous than the Great Depression. After the stock market crash of 1929, buying and prices fell along with the destruction of wealth in physical inventories.

The staggering 24.9% unemployment rate doubled by 1933. The United States was able to reestablish most citizen employment and return to economic benchmarks of 1929 after a full ten years, mostly as a result of war investments, which occurred in 1941.

Central banks and politicians have a tenfold harder time solving deflation than ordinary inflation due to the psychological ingrainment of deflation. To even start making headway against long-standing anxieties and lost fortunes, groundbreaking programs like the New Deal were necessary.

The government’s efforts to restore equilibrium between supply and demand through basic stimulus measures, such as compensating farmers not to harvest, were, at best, ineffective.

Regulators in modern economies must tread carefully when deciding on interest rates lest they unintentionally trigger deflation through drastic policy shifts.

In recent economic cycles, we have also witnessed smaller-scale manifestations of comparable fiscal concerns. As IT stock fortunes seemed to crumble suddenly in the early 2000s, former Fed Chief Ben Bernanke came up with the term “deflationary trap” to describe the economic crisis.

During the same decade, Japan faced the challenge of implementing experimental policies such as negative interest rates and quantitative easing to address the persistent problem of persistent price decreases that persisted for over 15 years.

The lesson here, according to experts, is that while high inflation could be challenging for consumers and households, deflation is far more difficult and dangerous for everyone.

Mixed Inflation Signals Could Mean Price Relief is Coming

The major issue therefore becomes: How can we address worries about rising prices while still ensuring that there is a certain amount of persistent inflation? There has to be a happy medium somewhere, because 2022 saw the greatest yearly inflation in more than 40 years.

Based on the relentless stream of worrying news reports, Baig hypothesizes that poll takers may already be under the impression that a recession is imminent. People may be thinking that, since times are going to grow fundamentally harder, prices might as well fall as well.

There may be hints that certain categories have already received their reduced rates in the mail. According to recent earnings reports from big-box stores, some deflation might be attainable without bringing the entire economy crashing down.

In the most recent quarterly report from Walmart, CEO Doug McMillon dropped the “d” word—deflation—that was just a few short months ago a possibility in the world of end-of-the-world preparedness.

As an example, he thinks that big-box retailers like Walmart may begin to gradually lower prices on some household products and groceries in the next months instead of continuing their months-long run.

This phenomena is already making its way onto store shelves nationwide. According to McMillon, general merchandise costs at Walmart have decreased by approximately 5% compared to last year at this time.

Now, even for the biggest brick-and-mortar store on the planet, a few pricing variations at one company won’t always constitute a trend. In contrast to high-priced durables, however, everyday necessities have a far greater influence on the typical consumer’s sense of financial well-being.

Uncertainty is likely to return if staples like milk and bread begin to decline once more. Though it doesn’t cover all aspects of inflation, it provides enough relief for individuals to relax.

So maybe there’s a future where people don’t freak out over grocery costs as much, even though inflation is raging in other parts of the economy like transportation, housing, and vacations. The gap between public opinion and expert analysis may be finally bridged by adopting that hybrid strategy that finds a middle ground.

Because, in one way or another, the masses of buyers are aching for a respite from the seemingly endless growth in prices. Furthermore, it is critical that the economy maintain a sufficient rate of growth to prevent the complete sputtering out of the American financial engine.

While safeguarding the overall structure, we simply need to let a few parts of that machine to begin cooling down.

Taking a break in the grocery store could be the key to keeping optimism high during these challenging times, especially as economic uncertainty is set to loom in 2023 for wider downturn risks.

We should all stop being so fixated on complaining about prices and instead take a minute to celebrate when a glimmer of hope emerges from the shadows. Every year throws a wrench into your finances, but the trick is to stick together through the ups and downs until the sun comes back out.

As long as we can look forward to better times, we should be alright.