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Why Americans are feeling bad about inflation despite a good economy

Americans despise inflation.

It's a loathing that colors their perception of the economy and their personal finances. And even if the Federal Reserve hits its so-far unmet inflation target of 2%, it won't be enough to soften that revulsion for most people.

In fact, if it were up to them, Americans would choose no inflation at all.

Those are among the findings from a pair of recent studies exploring how Americans feel about inflation, whether those feelings can change, and what policymakers should make of that sentiment.

The biggest gripe people have about inflation? How it cuts into their standard of living, forcing Americans to adjust their budgets by buying smaller quantities or lower-quality goods.

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"It is especially important to understand how people feel about it given that it is clear people suffer from it and have many negative emotional and stress responses to it," Stefanie Stantcheva, author of one of the studies and a professor of political economy at Harvard University, wrote to Yahoo Finance.

Case in point: A record share of Americans say that inflation remains their top financial concern, per a recent Gallup poll. That has weighed down confidence despite robust job growth since the start of 2021 and an unemployment rate that has stayed below 4% for 27 straight months.

Read more: Inflation slowed in April — here’s how that affects your wallet

The topic evokes just as much antipathy now as it did nearly three decades ago.

That's when acclaimed economist Robert Shiller set out to discover why consumers dislike inflation so much. What he found still resonates with Americans today, according to Stantcheva's study, which asks many of the same questions as Shiller posed.

Three-quarters of those in Stantcheva's study believe inflation erodes their purchasing power, nearly the same as the 77% who answered the same way in Shiller's study from 1996. And 80% of respondents in the recent study think prices are outpacing wages, even though hourly wage growth has exceeded inflation since February 2020.

Read more: How does the labor market affect inflation?

Americans also dismiss any positives associated with inflation, with 70% in Stantcheva's study saying "inflation indicates a poor state of the economy," echoing Shiller's findings.

"It is interesting to see that the core reasons and feelings are very similar to the mid-1990s despite all the changes the US economy has witnessed since then," Stantcheva wrote. "This suggests that these are deep-seated perceptions, beliefs, and attitudes that are perhaps not as sensitive to current events."

UNITED STATES - APRIL 6: A shopper takes a carton of eggs from the cooler in a grocery store in Washington, D.C., on Saturday, April 6, 2024. (Tom Williams/CQ-Roll Call, Inc via Getty Images)
A shopper takes a carton of eggs from the cooler in a grocery store in Washington, D.C., on Saturday, April 6, 2024. (Tom Williams/CQ-Roll Call, Inc via Getty Images) (Tom Williams via Getty Images)

So what is the ideal inflation rate for Americans? A second recent study teased that out, revealing a huge gulf between what consumers want and the aim of the Fed.

On average, Americans prefer a 0.20% annual inflation rate, well below the central bank's 2% target and far from where inflation currently stands — at 3.4% last month.

"That's the meat of this project," said Raphael Schoenle, one of the researchers of the second study and a professor of economics at Brandeis University. "Very few people want more than the Fed's perceived target."

Demographics and socioeconomic characteristics are the strongest predictors of people's preferred inflation rate, the study found. For example, older people and those whose income mostly comes from wages prefer lower inflation, whereas those with more assets favor higher inflation on average.

Economic reasoning also plays a role — albeit a smaller one.

The researchers tested this by exposing survey participants to one of five economic theories — two offering reasons for higher inflation and three providing reasons for lower inflation.

Afterward, the participants were again asked about their preferred inflation rate and which of the five inflation theories contributed to their preference.

Several theories moved participants' preferred inflation rate, but only one had a statistically significant effect on inflation preferences: that wages don't keep up with inflation and reduce purchasing power.

After being exposed to the wage inflation theory, respondents' preferred inflation rate was 1 percentage point lower than all other theories.

"If I wanted one takeaway from this before doing any further studies, [it] is that if you want people to agree with higher inflation, maybe you need to alleviate the concern of inflation eroding their wages," Schoenle said. "Because when they are treated with this idea, they do become more hesitant about higher inflation."

MIAMI, FLORIDA - MAY 15: A customer gets gas at a Shell station on May 15, 2024 in Miami, Florida. Florida drivers saw prices fall 16 cents a gallon in the past week just before drivers hit the roads for Memorial Day. The national average Monday was $3.62 a gallon, putting pressure on consumer prices as overall inflation eased. (Photo by Joe Raedle/Getty Images)
A customer gets gas at a Shell station on May 15, 2024 in Miami, Florida. (Photo by Joe Raedle/Getty Images) (Joe Raedle via Getty Images)

The distance between what inflation rate Americans find acceptable and what the Federal Reserve prefers complicates its efforts — at least in the court of public opinion.

While the 2% target is the widely accepted standard by central banks around the world, researchers from both studies maintain it's important for policymakers to consider consumer preferences.

After all, Schoenle said, "Economics is an evolving science … economists don't have one theory that says this is the target we have to have."

Understanding preferences shows that folks don't experience inflation in the same way, an important consideration for a central bank trying to keep the economy on solid footing. Even the many measures of inflation vary because they examine different expenditures.

"People with different incomes, as well as those living in different places, are facing very different inflation rates because of the basket of goods they consume or how they finance their purchases. This important variation is not well-captured by our standard measures of average inflation," Stantcheva wrote.

"This is also why it’s so important to not jump to conclusions when comparing perceptions to reality — our measures might not be capturing people’s reality and experiences at all."

Janna Herron is a Senior Columnist at Yahoo Finance. Follow her on Twitter @JannaHerron.

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