Inflation Is Easing, So Why Doesn’t It Always Feel That Way? Your Questions Answered
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Hey, What's News listeners. It's Sunday, August 18th. I'm Luke Vargas for The Wall Street Journal. And this is What's News Sunday, the show where we tackle the big questions about the biggest stories in the news by reaching out to our colleagues across the newsroom to help explain what's happening in our world.

And this week, inflation may be coming down. But when will prices from items in our grocery carts to insurance stop climbing so fast? And when will wages catch up to make the cost increases of recent years stop hurting so much? Those are questions on a lot of people's minds, feeling a disconnect between economic data and economic reality. So we're going to look at the outlook for costs and what past inflationary periods could tell us about the road ahead. Let's do it.

We have got a lot of costs to look at, a lot of experiences from our listeners to hear, a lot of questions about the future to consider. So let's get right to it, shall we? And to do that, I'm joined by Wall Street Journal economics reporter Harriet Torrey and Journal chief economics commentator Greg Ip. Harriet, I've given you quite the task here right out of the gate. Could you just walk us through where we are in terms of price increases on the things that make up a big slice of people's budgets?

Yeah, so I think the first point to make is that overall inflation has cooled a lot. Two years ago, inflation was up more than 9% year over year. Now we're at 3% year over year. That's a big cooling and that's offering some relief for consumers.

And some things like, for instance, food at the moment is rising more slowly than the overall CPI. But that doesn't really change the fact for people that prices have run up enormously since the start of the pandemic. Food prices are up about 25% since before the pandemic. And that really causes pain for people. Prices might not be rising as quickly as they were two years ago, but they're still going up bit by bit. Taking a more narrow timeline here and looking at the last few months, what about some other things that

that make up a big part of people's spend. Yeah, it's really services where we're seeing a lot of inflation at the moment. And it is pretty typical for services inflation to be generally hotter than goods. But services take up such a huge chunk of what people spend on every month. They're about two thirds of spending. And, um,

certain services just keep getting more expensive and it's frustrating for people. So if you look at something like childcare, it's only really a big expense for people with small children. So it's a small item in the CPI, but for people who have to pay it, it's huge. And when you're seeing inflation of 5% a year in childcare bills, they take up such a huge share of people's budgets. And we've also seen a lot of inflation in transportation services.

For consumers, it's extremely frustrating when they keep hearing all these stories about how inflation is cooling and then they get a bill for their car insurance and it's 20% higher than it was a year ago. Yeah, and we do seem to have a phenomenon here, right, where some prices are traditionally very reactive. They can drop quickly in addition to going up quickly, while others are characterized by a sort of substantial lag like car insurance, something that Patrick Johnson in Downards Grove, Illinois, called in to talk about.

For me, it's about insurance, car insurance, home insurance. I just received my latest bill. It's up 35% for my home insurance, yet no reason for those increases. Greg, tell us more about why price increases for certain things are taking so long to filter through to something like, for Patrick, insurance.

Well, a lot of prices respond with lags to sort of the inputs of costs. One of the reasons car insurance bills are going up is that the prices of cars went up a lot in the aftermath of the pandemic when there were shortages of semiconductors, there was a scramble to buy used cars, and you couldn't buy a car for love or money. So naturally, if you total that more expensive car, the insurance payout is more.

Insurers, though, need permission from state regulators to raise premiums. And so that naturally creates a lag between the increase in the cost of replacing a car and when it gets passed through to insurance. So what we saw in the data was that the cost of repairing and maintaining a car and then insuring it lagged movements in the price of a car by anywhere from 8 to 12 months. That's why even as we've seen overall inflation come down, that is to say prices aren't moving up as much,

Some of these lagged effects are still being felt, such as on car insurance. Let's get another listener in on the conversation. Now, this is Colin Stapleton Bradley in Bethlehem, Pennsylvania. I've seen in the past eight to 12 months or so that the cost for utilities for my wife and me have gone down. The notable change for us was that because we had to move house partially due to interest rate increases, our mortgage tripled.

Harriet, hearing that from Colin, it's a pretty stark illustration that even if people are seeing price improvement, relatively speaking, on a lot of the things that constitute their monthly spend, it can take just one of these lagging price increases to tip the scales back in the other direction and make a budget feel pretty quickly unsustainable.

So what the Labour Department called shelter makes up about a third, just over a third of the CPI. What people pay every month for their rent or for their mortgage payment is probably the biggest expense that they have. And shelter costs have been going up a lot and they continue to go up.

Greg, I'm sure people are listening to this and wondering how many more nasty surprises could be coming. Can we look to, for instance, the inflationary period in the early 80s driven by the oil shock in 79 or any other inflationary periods for clues as to how long we can expect these kinds of lagging indicators to to keep?

coursing through? The unfortunate reality is that it's highly unlikely, based on history, that you will ever have prices go back to where they were a few years ago. You mentioned the 1970s. After the Arab oil embargo, the price of gasoline rose 50 to 100 percent, and it never, ever went back to where it was before 1973.

People just kind of got used to that fact. And in time, people will have gotten used to the new normal of the level of prices for their airline ticket, for their house, for their car, for their cup of coffee, for their meal at McDonald's. But provided the Fed is on the case and ensures that the rate of increase in prices returns to what they consider normal, which is around 2% per year, people will eventually get used to where prices are and stop feeling so burdened by inflation.

We've got to take a very short break, but when we come back, we'll look at what can or maybe can't be done to get costs under control and the significance of voters' perceptions about inflation in an election year. We'll be right back. This message comes from Wall Street Journal sponsor C3AI.

C3 Generative AI enables rapid access to secure, traceable, hallucination-free insights from enterprise systems, all while using any LLM, helping enterprises turn the invisible into the obvious. Learn more at C3.ai. This is Enterprise AI. ♪

We were just talking about how long it might take for prices to stabilize. And several people we heard from basically said that deflation is necessary here. You mentioned, Greg, that broad deflation isn't very likely. But what about in certain areas?

I wouldn't be surprised, actually, if we see, you know, short periods of deflation in some categories. And frankly, profit margins are now so wide for so many companies, they have the ability to lower prices somewhat to hold on to market share if times get tough. So short answer, I wouldn't expect an overall trend of deflation, but I wouldn't be surprised to see some negative effects of prices here and there.

Honestly, you wouldn't want a persistent trend of deflation because that is normally a symptom of an extremely sick economy. And it's one for which the Federal Reserve really does not have the necessary tools to respond.

The silver lining here, such as it is, is that over time, prices and wages tend to move together. And what we've seen in the last year is that even though wage growth has come down, it has come down more slowly than price inflation. And so for the last year, the average worker has been coming out ahead in terms of their purchasing power versus inflation. In terms of

other active steps that could accelerate the processes we're talking about here. Listener Patrick Vivian in Providence, Rhode Island had this question for us. Patrick Vivian: With most people struggling to maintain their budget with food, how does the government or the consumer convince corporations to reduce their profit and lower prices for the good of the community?

Greg, what say you to that? Can the government, can consumers speed up the return of more moderate prices? Well, you know, we live in a primarily market-based economy where profit-making enterprises do not exist to essentially win applause for doing things for the good of community, but to basically earn the highest profits for their shareholders.

But how you earn those profits changes from time to time. For some time now, demand has been so strong that companies really felt no need to lower prices. We're now seeing signs of that changing. Companies like McDonald's, like Disney, like Delta Airlines telling us that demand is starting to slacken and that there's more competition and they're having to be a lot more conscientious about what they do with price.

Now, will the government going around and basically wagging their finger at corporate greed, does that make any difference? In the long run, not a lot of difference. But on the other hand, CEOs care about reputation, and they don't want to be thought of as greedy people. If they know that the government is watching them, they will indeed be more careful about what they do with price.

Honestly, the big actor here from a policy point of view is the Federal Reserve. We have a central bank precisely to deliver stable prices over time. And effectively, their message for the last two years has been, if we do not see inflation coming down, we will slow this economy until prices stop going up.

The point is that people are really frustrated by inflation and the fact that it remains high. And there is one surefire way to bring down inflation, especially in services, and that's a recession. But that's probably not a situation that really anybody wants because it means a lot of people will lose their jobs.

Right. Something people are certainly not going to be rooting for. Well, really ever. And especially something that would be very problematic in an election year. And I wanted to play one final clip from a listener, Stan Samples, who lives in Georgia, who sounded like he might have been hearing some messages from politicians about certain costs coming down and he just wasn't buying it.

We always love to talk about gas prices, but gas is not the only thing. There's lots of things that we have to pay too much for. Car insurance, cars, groceries, just the price to get somebody to fix something at your house has gone up. Stop talking about gas prices already. It seems like they want us to focus on that. That's the least of our worries. Before coming to you, Greg and Harriet, I actually asked journal editor Alex

Aaron Zittner, what he made of Stan's sentiment and the delicacy of messaging around inflation in an election year. And here's what Aaron had to say. Inflation remains a big issue in the election, and especially when you consider that there may be 11 to 15 percent of voters who are undecided. For them, the economy is more important than for the partisans who have already settled on a candidate.

This is a very tough issue for the Democrats because polls have consistently shown it's a durable, concrete finding that voters trust Donald Trump more than they do Joe Biden and now Kamala Harris on inflation. And Kamala Harris has to find something to say about inflation that doesn't associate her too much with the unpopular aspects of the Biden administration. Democrats have given up on trying to talk people into feeling something that they're not naturally feeling in their lives.

They're not saying you should feel better about inflation. Instead, they're saying, we hear you. We get it. And Kamala Harris specifically is saying, hey, I'm the product of a middle class family raised by a single mother. I know what it is to have hard times. And on the Trump side, he's playing the greatest hits. He says inflation is terrible. Biden has made it worse. We had almost no inflation when I was president, which is terrible.

Not a fair representation of the situation, but he's trying to amplify inflation as a problem. Democrats are trying to say, we acknowledge inflation as a problem and we're going to do something about it.

Harriet, what do you make of that sentiment? What does it tell us about the complexity of this issue politically? It's kind of a two-sided coin in a way. It is very frustrating for people seeing all of these things that are more expensive than they used to be. But the flip side of that is the reason why we've seen a lot of inflation and higher prices is because consumer demand has been really strong, because the labor market has been very strong, because people are prepared to go out and spend, and that has pushed up prices across the board.

We are beginning to see a cooling, but it is hard for people to really kind of grasp that the reason why they're paying more is because it's been a very strong economy. And as a result, prices for everything have gone up. I'm speaking to Wall Street Journal chief economics correspondent Greg Ip and Wall Street Journal economics reporter Harriet Torrey. Greg, Harriet, thank you both so much. Thanks for having us. Thank you.

And that's it for What's News Sunday for August 18th. Today's show was produced by Charlotte Gartenberg with supervising producer Christina Rocca, and we had help from deputy editors Scott Salloway and Chris Zinsley. I'm Luke Vargas, and we'll be back Monday morning with a brand new show. Till then, thanks for listening. This message comes from Wall Street Journal sponsor C3.ai.

C3 Generative AI enables rapid access to secure, traceable, hallucination-free insights from enterprise systems, all while using any LLM, helping enterprises turn the invisible into the obvious. Learn more at c3.ai. This is Enterprise AI.