Too damn high

Two years ago, inflation around the world hit levels people hadn’t seen for decades. In the U.S. that June, it rose by 9.1 percent—the most in 40 years. In response, the American Federal Reserve Bank hiked interest rates by more than it had in 30 years, and the stock market plunged by 20 percent in that month alone.

Since then, a lot of media coverage of the U.S. economy has focused on how the country managed an unlikely feat: bringing inflation down without causing a recession or significantly increased unemployment. Inflation dropped below 3 percent this summer and has continued to decline. Meanwhile, job numbers appear strong: The unemployment rate barely crept above 4 percent this year, average hourly wages have risen all year, and the country has added jobs for a record 46 months in a row. U.S. GDP growth has hovered around 3 percent for much of the year, far outpacing other Western economies.

But compared to before the Covid-19 pandemic, prices for basics like food and housing are still way higher—and people are angry about it. Food prices are up by an average of 28 percent since 2019. Rents and home prices have been rising faster than incomes for decades across most of the U.S.; the average U.S. home price is 47 percent higher than in 2020; and the average rent is up 26 percent.

Polling this year found that almost two-thirds of Americans thought inflation was a very serious problem—and in a survey of voters taken one month before November’s national elections, they said inflation and prices were the most important issue to them, with immigration a distant second. On December 8, President-elect Donald Trump said on the public-affairs TV show Meet the Press, “I won on groceries.” What’s happening here?

Peter Ganong is an associate professor of economics at the University of Chicago and a research associate at the National Bureau of Economic Research. Ganong says there’s actually no single cause driving long-term inflation. The causes vary from sector to sector—including the pandemic, the legacy of the Great Recession, and the war in Ukraine. The stronger patterns, he says, are in the effects: Higher prices aren’t just taking up a growing share of people’s budgets; they’re suppressing opportunities for millions of Americans to improve their families’ lives—what economists call social mobility. The average U.S. household today, for instance, spends about a third more on housing than it did 100 years ago, as a percentage of its budget, adjusted for inflation. In human terms, higher housing costs often mean a net loss in income for anyone who wants to move somewhere where there’s a stronger economy and higher-paying jobs …

Michael Bluhm: There’s a lot of concern in the U.S. about rising prices, particularly housing, food, health care, and higher education. Where do you see higher costs affecting people most?