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There is more good news regarding inflation. Americans may find it hard to believe.

There is more good news regarding inflation.  Americans may find it hard to believe.

 


By Hannah Erin Lang

The purchasing power of the average household actually increased between 2019 and 2023, according to a government report. But the best paid employees always come out on top.

There is some good news on the inflation front, but it will likely provide little comfort to Americans still mired in years of high prices.

A new report from the Congressional Budget Office released this week shows that inflation may have had less impact on household bottom lines than months of sticker shock on everything from Big Macs to day care suggest.

The agency's analysis looked at a typical household's “consumption bundle” in 2019: goods and services representing a year's worth of purchases before the pandemic.

Next, the researchers analyzed how much households would pay for that same consumption package at 2023 prices, and how much their income increased or decreased over the same period.

On average, household purchasing power increased during this period, the agency found.

“By the CBO estimate, overall income increased more than prices between 2019 and 2023,” the report said.

The trend varies by income group, and it is households with the highest incomes who have seen their purchasing power increase the most.

The share of household income needed to purchase the same set of goods and services fell by 2% for the lowest quintile of households, and by 6.3% for those in the highest group.

This echoes recent concerns of a “K-shaped economy” in which affluent consumers are doing well, while lower incomes are left behind.

The inflation rate declined significantly from 2022's all-time highs, but remained stubbornly above the Federal Reserve's target of a 2% year-over-year price increase. On Wednesday, the Labor Ministry announced a rate of 3.4% lower than forecast, alleviating fears of a further acceleration in price increases.

Household purchasing power is affected by both rising costs and changing incomes, the CBO report notes – and the influence of each factor varies by income level.

For example, prices for the typical consumption package in 2019 increased more for lower-income households than for wealthier consumers.

This is likely because fixed expenses – notably food and energy, the prices of which have soared in recent years – represent a larger share of these households' budgets.

“Conversely, the income available to pay for this consumption set increased more for high-income households than for low-income households over the same period,” the agency said.

Yet low-income consumers have also seen their incomes rise in recent years. Wage gains for the nation's lowest-paid workers exceeded those of any other group between 2019 and 2023, according to a recent report from the Economic Policy Institute.

Read more: The lowest paid American workers are seeing their wages rise faster than any other group of employees

Because CBO's analysis only looked at the typical set of goods and services purchased in 2019, the analysis does not take into account how household spending habits may have changed as a result of the pandemic.

But many Americans admitted to spending more in some areas and cutting back in others, post-COVID. Some consumers splurged on travel, concert tickets and other experiences that completely disappeared during lockdowns. Others have given up dining out, putting a strain on the bottom lines of companies like McDonald's and Red Lobster.

Read more: Financial experts have advised consumers to stop 'wasting' their money eating out. They are finally listening – and businesses are shaken.

Still fed up with inflation

The CBO's findings are unlikely to reassure the average American, who often focuses much more on absolute price levels than whether their wages will rise relative to prices, economists say.

“People don't have time to write all this down on paper and pen,” said Michael Walden, an economist and professor emeritus at North Carolina State University. “They just have an idea.”

This translates into persistent economic pessimism among consumers. A preliminary reading of the University of Michigan's consumer confidence gauge fell to its lowest level in six months on Friday, mainly due to negative inflation expectations.

Frustration over high prices poses a political obstacle for President Joe Biden as the November general election approaches. Americans' confidence in Biden's economic management has fallen to one of the lowest levels measured for a president since 2001, according to a Gallup poll.

We want to hear from readers about how rising costs and a changing economy are affecting your life. If you would like to share your experience, write to [email protected]. A journalist from our team may contact you.

-Hannah Erin Lang

This content was created by MarketWatch, which is operated by Dow Jones & Co. MarketWatch is published independently of Dow Jones Newswires and the Wall Street Journal.

 

(END) Dow Jones Newswires

05/17/24 0600ET

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