The Great Inflation is, thank goodness, over.
Four years ago, the coronavirus pandemic kinked the planet’s supply chains, causing shortages of everything from semiconductor chips to box fans. War and drought led to disruptions in commodity markets. Temporary lockdowns and a permanent shift away from offices altered consumers’ purchasing patterns. Families found themselves flush with government stimulus money. A tight labor market drove up wages. Those factors combined meant that families had more money to spend at a time when supply was constrained—and businesses took advantage. The price of everything went up, all at once. And for the first time since the 1980s, inflation became the central economic problem in American life.
Now the annual rate of inflation has fallen from a peak of more than 9 percent to just above 3 percent. Retailers are starting to make well-publicized price cuts, seeking revenue by drawing customers in rather than just charging them more. Burger King and McDonald’s are promoting $5 value meals, and Target, Michaels, Giant, Amazon, and Walgreens are slashing the cost of tens of thousands of frequently purchased items such as diapers and cat food.
Finally, families are getting a little breathing room—something that is already showing up in consumer-confidence surveys. A new Federal Reserve Bank of New York poll shows that nearly four in five respondents expect to be doing as well as they are now or better in a year, the highest proportion since 2021. I’d be surprised if Joe Biden’s approval ratings did not begin rising too.
This is all good news. But the United States had a huge problem with prices even before this intense bout of inflation—and will continue to have a huge problem with prices going forward. The sharp increase in costs for small-ticket items that families buy on a day-to-day basis made prices far more salient for American households, but it is the big-ticket, fixed costs that have had the most deleterious impact on family finances over time. These are the costs that are truly sapping average Americans’ ambitions to get ahead, and they are not going down.
From the aughts until the onset of the coronavirus pandemic, inflation was essentially a nonissue in American life. The country was suffering from anemic growth and anemic demand: low interest rates, low productivity growth, stagnant wages, and high inequality. The only upshot, really, was that prices were stable and stuff was cheap. Crummy earnings went pretty far at fast-food restaurants and big-box stores, thanks to global supply chains and manufacturing advances. Even homeless people had smartphones. This was the neoliberal deal, supported by Democratic and Republican administrations alike.
This paradigm began to shift during the Trump administration, as the country’s low unemployment rate started generating strong wage gains and ample demand. Then, the COVID crisis led to families being showered with stimulus money just as it throttled the supply of dozens of goods. People might have been happy about increased wages and declining inequality, but all they saw was inflation.
The cost of just about everything went up, after more than a decade of not simply price stability but price stagnancy. The numbers on price tags in the grocery store climbed a whopping 13.5 percent from the summer of 2021 to the summer of 2022. Gas prices went up as much as 44 percent year over year. Landlords began asking for $300, $500, even $2,000 more a month for rent.
In response, the Federal Reserve jacked up interest rates—making many things yet more expensive, including mortgages and car loans. Rising prices rattled everyone, rich and poor alike. The shock was repeated and insistent: Every cup of coffee, every Friday-night pizza, every taxi ride home, every flight to see the in-laws, every item that needed to go in the grocery cart acted as a reminder of the cost of living and the impossibility of thriving.
But prices had been a problem long before this sharp burst of inflation. For decades, continuously high prices on big-ticket goods and services have been quietly eating away at American incomes and forcing families to make miserable financial decisions: to delay getting married, to give up the dream of a third kid, to settle in an exurb rather than a city, to put off starting a business.
First, and by far worst, is housing. When the real-estate bubble collapsed during the George W. Bush administration, residential construction cratered and never fully recovered. We are building as many homes now as we were in 1959, though the population has doubled. And we are building a negligible number of homes in the superstar cities where wage and job growth have been strongest. The result is a catastrophic housing shortage and obscene prices, particularly for low-income renters. Indeed, rents have gone up 52 percent in the past decade, whereas prices in general have risen by 32 percent.
Second is the cost of health care. The United States spends 17 percent of its GDP on health services, nearly twice the OECD average, for no better outcomes. The prices are the problem. Insurance costs more here. Prescription drugs cost more here. (Insulin, a century-old drug, costs nine times as much in the United States as it does in our peer countries; Ozempic is five to 11 times pricier.) Surgeries cost more here. Emergency-room visits cost more here. Administrative costs are absurd here. Aggregate health spending has flattened out since the Obama years, allowing for stronger wage growth. But the country has amped up out-of-pocket burdens: Adjusted for inflation, they have risen steadily and now sit at $1,400 per person, per year.
Third, child care. The median annual cost ranges from $18,000 to $29,000, depending on the child’s age and the care setting. In high-cost cities, such as New York and San Francisco, families routinely shell out even more than that. Millions of Americans who can’t afford it, predominantly women, drop out of the labor force or quit working full-time to take care of their kids.
These obscene costs for working families do not translate into living wages for child-care workers, many of whom live in poverty. The situation has gotten even worse lately, as tens of thousands of day-care workers and nannies have opted to switch to better-paid positions, including in retail, and as pandemic-related federal funding has dried up. Many centers have been forced to raise tuition, though parents are already paying more than they can afford.
No wonder Americans report feeling like they just are not able to get ahead, no matter how much they are earning. In interviews, many folks tell me they simply do not believe that wage growth has outpaced inflation, or that wage growth has been stronger for low-income families than for high-income families, or that middle-class families are wealthier today than they were a few years ago, or that inflation has cooled off to unremarkable levels, despite all of those things being true. It feels awful to pay $15 for a fast-food lunch when you can barely cover your rent. It is infuriating to spend 40 percent more than you wanted to on your weekly errands when you just put a doctor’s bill on a credit card.
Going back to the old neoliberal paradigm would be the worst of all worlds. Middle-class folks might not like spending more on McDonald’s and Uber rides, but paying more would be worth it if it meant that more American workplaces offered middle-class jobs.
Yet I worry that the new paradigm is not going to be much better. Washington has a huge range of options to increase demand in the economy. It can send families checks, amp up unemployment-insurance payments, and cut interest rates down to scratch. It has very few options to control costs and even fewer to increase supply, particularly because building homes, hiring nurses, and constructing new day-care centers would be inflationary in and of itself.
Still, shortages in child care and housing, and obscene prices for health care, pose a threat to American families’ thriving. People should stop being mad about the cost of a Big Mac, and start being mad about the cost of that appendectomy and this month’s day-care bill.
