The way inflation has fallen toward the Federal Reserve’s goal with little cost to jobs has many convinced the central bank has won the battle. Victory, however, requires persuading people like Steve DelGiorno that price increases are a thing of the past.

DelGiorno’s restaurant group — Crema Concepts LLC in Danville, Virginia — has tried to hold menu prices stable over the past two years despite the higher cost of everything from paper cups to eggs. But he doesn’t think he can hold out much longer.

“Turkey, meats, roast beef, ham — it’s crazy. We have eaten as much margin as we can,” DelGiorno says. “What they are reporting is not what we are experiencing,” he says of the government’s inflation statistics.

Fed officials are expected to hold interest rates steady when they meet this week, but dramatic inflation progress in recent months has some predicting officials will start cutting borrowing costs at their subsequent gathering in March.

The inflation metric the Fed targets rose 2.6% in December from a year ago, much improved from the four-decade high of 7.1% seen in 2022. Policymakers’ preferred gauge of underlying inflation has slipped to its slowest annual pace in nearly three years, and widely watched measures of inflation expectations have fallen as a result. 

But price shocks can have long echoes in the memories of consumers and businesses.

While inflation has eased, prices have not. Efforts by Americans to catch up to inflation — real or perceived — risk keeping the kind of price stability the US enjoyed for decades out of reach. That’s one reason why Fed officials have indicated they’re in no hurry to cut the benchmark lending rate.

Former Fed Chair Alan Greenspan described price stability as a world in which inflation is so low that neither businesses nor households factor price changes into their daily decisions. But it’s clear the more than 19% surge in consumer prices over the past four years continues to seep into Americans’ views about inflation.

Each week, polling firm Morning Consult asks households how much their incomes would have to rise to purchase the same goods and services they are buying today a year from now. While that measure peaked just above 8% in November 2022, consumers still say they’d need their incomes to rise 5.8% over the coming year to cover those same expenses.

Thinking About Inflation | Underlying inflation is falling, but price views are stabilizing at an elevated level
“Consumer attitudes on inflation have improved as inflation has improved,” says Kayla Bruun, a senior economist at Morning Consult. “But overall, there is still a lot of price consciousness.”

“The consumer mindset around prices and inflation is not back to normal,” she says.

Michael Weber, an associate professor at the University of Chicago’s Booth School of Business, calls it “price nostalgia.” Consumers remember what they used to pay for eggs or an oil change. When they go to purchase that same good or service today, the higher price reignites the perception that inflation is high.

It doesn’t help that many prices continue to climb.

Though there are indications businesses are seeing more consumer pushback from price hikes, a net 25% of small businesses reported recently raising prices in a December survey from the National Federation of Independent Business. A third of owners expect to increase prices further in the next three months.

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