Guest Contribution: “Six Explanations for Misperceptions Regarding the Strong Economy”

Today, we present a guest post written by Jeffrey Frankel, Harpel Professor at Harvard’s Kennedy School of Government, and formerly a member of the White House Council of Economic Advisers. A shorter version appeared at Project Syndicate. 

February 25, 2024 — By now, quite a variety of explanations have been offered for the puzzle that the unusually good state of the US economy has not been reflected in public opinion surveys, and especially not in polls regarding President Joe Biden’s bid for re-election in November.  At least six hypotheses have been put forward regarding the performance-perception gap.

Biased perceptions

  1. Some charge that the official statistics must be wrong, out-of-touch, failing to capture the true state of the economy. This hypothesis is itself wrong.  While any given number is subject to measurement error, the evidence from a wide variety of statistics, most of them gathered separately, has been overwhelming.  They tell a very positive story, whether one looks at the measures of economic growth (GDP), strength in the labor market (jobs created or unemployment), or inflation (either CPI or PCE, and either headline or core).

Media commentary over the last two years has emphasized that the economy and job market have been slowing down.  They usually fail to note that, although this is true relative to the breakneck growth of the year that immediately followed the pandemic shutdown, the current rates of expansion of GDP and employment are above their post-2000 averages.

One must acknowledge that there is a lot of paranoia in corners of the population.  But any claims that the government is faking the statistics come from a lack of knowledge regarding the integrity of how the professional bureaucracy works at the Bureau of Labor Statistics (BLS), Bureau of Economic Analysis (BEA), and other agencies.  To illustrate the actual procedure, the Secretary of Labor never even knows what the employment numbers will be, until the moment when his BLS statisticians announce them, on the first Friday of each month.

  1. The reported unpopularity of Bidenomics reflects the weight of highly partisan survey responses among Republicans, as Paul Krugman has been pointing out.  Despite the old reflexive tendency to describe the two parties symmetrically, they in fact are not comparably partisan.  Movements over time among Republican poll-respondents are heavily influenced by which party controls the White House:   When Donald Trump succeeded Barack Obama as president (2017), Republicans decided that the economy was not as bad as they had been saying; but when Joe Biden succeeded Trump (2021), they suddenly rediscovered the economic deprivation of the American household.  Meanwhile, Democratic respondents in polls react more to changes in the actual state of the economy.


  1. Media tend to focus on the downside. Increases in gasoline prices are reported more prominently than decreases.  Journalists in 2022 gave frenzied attention to those forecasters who proclaimed that a recession in 2023 was near  certain, while paying less attention to those who disagreed.  A post on social media that reports a single misleading anecdote of a price increase can go viral.
  2. Perceptions lag behind reality. At the time that President George H.W. Bush lost his bid for re-election in November 1991, the US was thought to be still in recession, even though the recession had ended in March.  In the November 2010 congressional election, and even when President Barack Obama ran for re-election in November 2012, many Americans thought the country was still in the grip of the Great Recession, even though it had ended in June 2009.  It takes two years for a change in inflation to have ¾ of its cumulative long run effect on consumer sentiment.  Under this lag hypothesis, there has not yet been enough time for perceptions to adjust, since inflation did not start to come down until June 2022.
  3. Money illusion. People are still upset about inflation, even after it has come well down from its peak, because the level of prices remains much higher: 16 % higher, for the CPI, from January 2021 to January 2024.[i] The claim is that the intervening inflation of the last three years has left households with a lower standard of living.

Let’s look into this last explanation.  Of course, pundits must never suggest that elite observers might know something about the economy that the public is getting wrong.  That is not just a rule of politics.  It could also be interpreted as a rule of economics — that one must take the public’s tastes as given.  De gustibus non es disputandum; there is no arguing with tastes.  If the public dislikes inflation as much as it dislikes unemployment, economists should take that as a given.  But we don’t have to accept erroneous reports about the increase in prices eroding real incomes.

True, it is hard to get used to encountering sticker shock.  But that doesn’t mean that the 16% increase in prices since 2021 has left people with a lower standard of living.  During this same period of time, hourly wages have also gone up 16 %[ii],  national income has risen 18 %[iii]; nominal GDP has increased more than 21 %[iv] and dollar consumer spending has expanded a remarkable 23 %.[v] It follows arithmetically that households’ purchasing power is higher in real terms than it was three years ago

To be sure, inflation can be dangerous, especially when it becomes embedded.  Even though the genuine costs of moderate inflation are low in a given year, compared to the real economic benefits of growth, it is not possible to keep the economy overheated permanently.  Inflation that creeps up will interfere with the working of the economy.

But media reporting, whether mainstream or alternative, often says that the rise in prices makes it harder for many Americans to make ends meet, that inflation has undermined incomes, and that it has caused the typical household to cut back on spending.  There is no question that many people find it hard to make ends meet.  But that was also true before the inflation.

There are at least two current indications that people, at some level, feel that their lot is improving.  First, as Krugman points out, poll respondents are more positive about their own economic finances; it is when asked about others that they reflect pessimism.  Second, consumer spending has in fact risen rapidly.

So, while the economist must accept the unpopularity of inflation, or even a higher price level, it would not be truthful to accept claims that it has reduced purchasing power.  Perceptions of impaired real income are mostly due to money illusion.

  1. The next stop is the fear that, even if inflation is not hurting the average citizen, it is hurt those on lower incomes. It isn’t. Real weekly wages have been rising since inflation peaked in the second quarter of 2022. That is particularly true for the lowest decile of workers.  What about the elderly person who lives off social security, and makes mortgage payments on their house that in 2020 left their bank account empty at the end of the month?  They are now ahead of the game, because social security payments are indexed to inflation.

Is the perception gap ending?

While there need not be one single explanation for perceptions of poor economic performance, the lag hypothesis seems most persuasive.  Indeed, some of the most recent survey numbers suggest the beginnings of a possible turnaround in popular attitudes.  Although the University of Michigan’s consumer sentiment index was puzzlingly low in 2022 and early 2023, it has risen since November.  The Gallup poll reports fewer voters rating economic issues the most important US problem than it did in November, and more expressing confidence.  Some media are reporting improved perceptions.

In just two years, the dominant narrative has shifted from “we are currently in recession” (early 2022), to “a coming 2023 recession is inevitable” (late 2022), to “confidence in the economy is low” (early 2023), to “there is a gap between bad perceptions of the economy and good statistics” (late 2023).  Perhaps the narrative tomorrow will be simply that people recognize a good economy.


[i] = log 308.85/262.6.

[ii] = log 29.66/25.17

[iii] = log 22.497/18.701.  Q3 2023 / Q4 2020

[iv] =log  27.9/22.6 as of q4 2023, over Q1 2021

[v]  =log 19.002 /15.047 in Dec. 2023


This post written by Jeffrey Frankel. 

38 thoughts on “Guest Contribution: “Six Explanations for Misperceptions Regarding the Strong Economy”

  1. pgl

    “True, it is hard to get used to encountering sticker shock. But that doesn’t mean that the 16% increase in prices since 2021 has left people with a lower standard of living. During this same period of time, hourly wages have also gone up 16 %[ii], national income has risen 18 %[iii]; nominal GDP has increased more than 21 %[iv] and dollar consumer spending has expanded a remarkable 23 %.[v] It follows arithmetically that households’ purchasing power is higher in real terms than it was three years ago”

    We have been telling Bruce Hall this for a long time. But then little Brucie is only allowed to believe what he hears on Faux News.

        1. pgl

          Seriously dude? We get you need Putin to give you your daily dish of dog food but to suggest that strong economic growth in other nations justifies the right to Putin to freely commit war crimes in Ukraine is dumb even for you. And you have proven many times you are the dumbest troll ever.

        1. JohnH

          If it doesn’t conform to pgl’s personal opinions and biases, it must be a lie! NABE survey results must be a lie! US winning the economic war must be a lie! Evidence be damned!

      1. Jeffrey A Frankel

        Reply to JohnH
        I am not aware of much of a perception gap regarding the Russian economy. It is true that when serious sanctions were imposed in response to the Russian invasion of Ukraine, economists generally expected them to have big effect on Russia’s economy, and that the reality has turned out to be substantially better for Russia than was forecast. This is not a perception error. It is a prediction error, which is rather different.

  2. New Deal democrat

    In general I agree with almost all of Prof. Frankel’s points. In particular the case for the asymmetrical partisan divide in consumer confidence has been well made by many observers over the past few years. The citation to the first President Bush and the lag in economic perceptions is also an important episode.

    One further point I think needs to be emphasized about last year is that it showed just how important outright deflation in commodity prices, and in particular gas prices, is to the trajectory of the economy. Going back a full 100 years, with one exception no recession has lasted more than 12 months after commodity prices went negative YoY, and expansions have benefitted from the strong tailwind. The only exception is when wages also went into deflation during the 1929-32 Great Contraction. And the nearly 10% YoY contraction in commodity producer prices as measured by the PPI last year was one of the strongest on record. This result of the un-kinking of the supply chain meant that two of the primary conduits for Fed policy creating a contraction were overcome, as actual construction increased, and increased motor vehicle manufacturing almost completely counterbalanced contraction in other manufacturing sectors.

    Further addressing the issue of public perception, by way of anecdata, recently I had occasion to catch up with cousins and their children on both sides of my family. Without any prompting from me, inevitably the table talk turned to the state of the economy.

    The most important thing I learned by listening to them was that by far inflation remains the #1 topic across the board. Nobody seemed to think that incomes were keeping up. There was skepticism even after I pointed to the relative better performance of average hourly wages in the past three years vs. inflation, and even after comparing their best guesses for things like eggs with the actual data (I actually showed them the FRED graphs).

    Although we’ve seen improvement recently across measures of consumer confidence, I suspect there appear to be several reasons for the persistence in the beliefs that inflation has made people in general worse off.

    The first goes back to a principle of psychology: to be more effective, reinforcement has to be more frequent and more recent. When it comes to prices and incomes, prices of things like gas and groceries are encountered almost every day. Thus there is constant reinforcement of that data. But paychecks (and social security payments for retired people) are typically only received biweekly or even monthly, and they typically don’t increase except for once a year. Thus the reinforcement of the price data is far more powerful than the reinforcement of income data. And we also know that actual losses are perceived far more sharply than similar gains.

    A second important distinction is that “job switchers” have received much bigger pay increases than “job stayers.” For people in stable careers – who are much more likely to be job stayers – it’s entirely likely that a large minority at least have not received pay increases that have equaled inflation over the past three years.

    The third issue is that real median household income might not have followed the positive trajectory of real hourly wages or median weekly wages. Real median household income was down sharply even in 2022 (in part because pandemic job losses had not yet been completely made up).

    Unfortunately real median household income is only updated annually, in September of the following year. But several private firms have used the monthly nonfarm payrolls data to estimate this. One of them is Motio Research. Their data through January 2024 shows a 1.7% YoY increase, with all of that increase coming within the last six months. Until the middle of last year, real median household income had fallen back to 2019 levels. Only in the past 6 months has it risen to better than all levels except for those months during the pandemic where income included government stimulus payments.

    1. Macroduck

      Excellent points all around. Here’s a bit for which we have data ready at hand:

      “The third issue is that real median household income might not have followed the positive trajectory of real hourly wages or median weekly wages. Real median household income was down sharply even in 2022 (in part because pandemic job losses had not yet been completely made up).”

      Fair point. The payroll index, adjusted for inflation, contains much of the information in the real median household income measure, but doesn’t account for the number of jobs per household:

      Real median household incomes are more variable than the payroll index, and take longer to recove after recessions. Job growth remained strong through 2023, so we have reason to suspect real median household incomes rose in 2023, as you point out. But history suggests that real median household income take considerable time to recover fully from recession:

      Some recessionary effects are long lasting.

  3. baffling

    sorry, its off topic but still a relevant issue on this site
    EV sales are not bad, contrary to some on this site have argued. we just need some better policy in place, especially for the buildout of chargers. and the tax credit is flawed. I would have bought an EV last year, but our household did not qualify for the credit. that was a lost opportunity, because we ended up not buying another car yet. probably will go with a solar rooftop when we buy an EV in the future as well, but texas needs to improve its ability to sell power back into the grid for that to be economical. still some work to do, but we are getting there. go EV.

  4. pgl

    “At the time that President George H.W. Bush lost his bid for re-election in November 1991”

    Of course you meant November 1992.

  5. Macroduck

    Frankel’s point 1 is partly about evidence of misperception, though he does note reporting which does a bad job of characterizing the strength of growth. Other points repeat the fact that the press is serving its own needs rather than accurately reporting facts.

    This is not a negative criticism. Everything Frankel notes is part of the “bad economy” stew.

    Partisanship, lagged realization, bad journalism are all factors.

    I will say that lagged realization of improvement is natural. If my situation hasn’t been good and hasn’t yet turned around, then I might not be ready to take good news to heart. Same for worries, even if my situation hasn’t been bad. Good economic times don’t come with the turn in the business cycle. They come after the turn.

    But 3.7% unemployment, millions of new jobs and rising real wages are late-cycle good news. That’s not a lag problem. Inflation and mortgage rate/housing market perceptions are more likely candidates for lagged impressions.

  6. pgl

    Bruce Hall tells us one of his worthless links is “interesting”. But of course Brucie cannot take a stand and tell us it is interesting. I will take a stand – it was boring and worthless. Now had little Brucie bothered to read Dr. Frankel’s post he would realize what such dumb surveys back in the summer of 2022 are worthless.

    But no – Kelly Anne Conway has ordered little Brucie not to read Dr. Frankel’s excellent post.

    1. Bruce Hall

      I’d just like to point out that the article in The Atlantic was just written… perhaps you might have noticed that. And I’d also like to point out that the author reference many data including through the end of 2023 and beginning of 2024.
      According to a CNN poll in late January, 63 percent of Democrats ages 45 and older believed that the economy was on the upswing—but only 35 percent of younger Democrats believed the same. To fully embrace the economy’s strength would be to sacrifice part of the modern progressive’s ideological sense of self.

      But somehow you became fixated on something you thought discredited the article which seems to fit your need to be haughtily negative. You don’t have to agree with the article, but snide comments certainly are not a rebuttal. Make some real counterpoints for once.

      I have no idea who you really are or what your credentials are, but in the end that doesn’t matter because you seem incapable of a civil discussion and that says all I need to know. There are ways to disagree without being an ass.

      1. pgl

        Ho hum. A lot of boring trash has been recently written. But come on Brucie – with your whining you failed to tell us why this trash was interesting.

      2. Macroduck

        “To fully embrace the economy’s strength would be to sacrifice part of the modern progressive’s ideological sense of self.”

        The first part of the paragraph you quote reports data. However, the author then veers into rank speculation. “Ideological sense of self”? Says who? Never mind that under thirties are, as a group, in quite different economic circumstances than over thirties. Karma went beyond facts into speculation, and that’s what you decide to quote. “Interesting”.

  7. pgl

    CPAC Faces Unprecedented Low Turnout: “Now It is Just a Circus”

    The Conservative Political Action Conference (CPAC) this year sees reduced numbers, with both the venue size and participant turnout not matching previous gatherings.

    Well at least Bruce Hall got a seat and there was no one within 6 feet of him! n

  8. pgl

    “But that doesn’t mean that the 16% increase in prices since 2021 has left people with a lower standard of living. During this same period of time, hourly wages have also gone up 16%”

    We should compare the chirping from JohnH as to how real wages are allegedly falling in the US but are rising in the UK.

    Dr. Chinn has provided us posts that lately nominal earnings in the US are rising faster in the US to which little Jonny boy gets all upset and tells us over this longer period of time, prices have increased more than earnings. But as you point out – that is not true.

    Over in the UK real wages in the last 3 years have on net declined. But little Jonny boy says forgot all of that as real wages are “moving in the right direction”.

    Two faced lying or being dumber than a retarded rock?

    1. JohnH

      If pgl bothered to read my recent comments, he would know that I noted that real wages have been rising…due to disinflation. Why does pgl have to lie constantly?

  9. pgl

    Personal Consumption Expenditures: Chain-type Price Index increased by 14.8% (less than the 16% rise in CPI) over the past 3 years.

    “dollar consumer spending has expanded a remarkable 23 %”. I get that the 3 year rise in nominal consumption was just over 28%.Then again I’m using December 2020 to December 2023.

    In either case, real consumption has risen by not as much of nominal spending. Of course you know that. It seems when JohnH praised the UK boom by noting nominal retail sales hit a record high, this clown forgot to notice his own link showed how retail volume had declined.

    BTW Jonny boy also accused the good professionals at BEA for being partisan Biden socialists for using Personal Consumption Expenditures: Chain-type Price Index. But you knew he has often made just insulting accusations of good people.

  10. pgl

    JohnH’s lying about the UK economy has no bounds. He recently claimed Jeffrey Sachs defended the notion that weak aggregate demand could raise real wages. I was wondering WTF Sachs wrote such heresy. I found this discussion which seems to be what lying little Jonny boy was referring to.

    Sachs noted both the US and the UK fell below full employment and both had recovered over the years. Fair enough. Neither nation has the type of fiscal stimulus some of us would have liked to see. But the BoE and the FED both kept interest rates low enough to get at least some recovery going.

    But of course little Jonny boy keeps saying low interest rates – even during depressed economies – is horrible, just horrible. And lying little Jonny boy wants us to believe Sachs agrees with his nonsense. No Jonny boy – he does not. And you are disgusting little liar for claiming so.

  11. James

    Of course, Trump during his rally speeches has a constant refrain of the economy is terrible. And the anti-Trump GOP types like Haley also make the claim that the economy is terrible. And the media is happy to interview a diner owner in the Midwest complaining about having to pay workers more than minimum wage and the price of eggs is forcing him out of business.
    One of the most remarkable but un-remarked by the media Bidenomics .statistics is that for the first time in decades wealth inequality is decreasing
    “Very elevated wage gains, new business starts and prime-age worker participation rate. 1.3 job openings per unemployed person. Real wage growth we are seeing – wage growth minus inflation – is currently running at highest levels in decades”
    “Median wealth up 37% from 2020-2022; median wealth for 18-34 year olds in this period more than doubled”
    This is a from the bottom up and middle up economy and not a trickle a few crumbs down from the top – GOP economy.

  12. pgl

    I would thought dumber than rocks and dishonest as it gets JohnH would cease with his lies and distortions over UK real wages under Cameron after this classic take down by Dr. Chinn:

    But NO – this disgusting troll as at it again claiming (dishonestly) that Jeffrey Sachs agrees with Jonny boy’s gold bug trash that weak aggregate demand led to higher real wages. No real wages FELL under Cameron with a partial and only partial recovery in 2014/2015. Back then Dr. Chinn added a central point to this discussion noting a good source on how the UK output gap evolved over time. OK such basic macroeconomics is way over little Jonny boy’s head which is why I added this:

    ‘“I might venture to guess that real wages rose because the output gap nearly halved going from 2014 to 2015 (according to latest IMF WEO estimates).”

    IMF WEO is very useful and rather easy to navigate. I was able to quickly pull the output gaps for the G7 for the period from 2010 to 2017.

    It turns out that this gap was 3.3% when Cameron took office in 2010. It was still 2.9% 3 years later. By 2014, it still was 1.8% and fell to 1% by 2015 and to 0.5% by 2016. In other words, a slow recovery from the Great Recession. Fiscal austerity would do this when interest rates remain near zero.

    Of course the US had a deeper recession and also a painfully slow recovery, which most people would attribute to the Tea Party Republicans handicapping Federal fiscal stimulus while imposing some rather drastic state fiscal restraint. But shhh – don’t tell this to fiscal austerity hawks like the friends of David Cameron and Paul Ryan.’

    Now I tried back then to draw this in canyons for low IQ Jonny boy but it seems he still did not get the simple point.

    1. JohnH

      pgl just cann’t stop lying–real wages did start rising in 2015…after inflation abated. And they continued to rise for the next couple of years…until inflation started rising again.

      Of course, Krugman claimed that because the UK was threatened by deflation, workers would suffer, the unemployment was near record lows, the participation rate was near record highs, and real wages were rising.

      pgl insists on rewriting well documented history and to blame Cameron, whose policies were very similar to Obama’s

      1. pgl

        Lying by presenting the entirety of the data? Dude – you have been called out over and over again with respect to your lies. Coming back and accusing me of lying just shows what a stupid little pathetic troll you really are. Seriously – you have wasted so much time over the last 8 years on two different blogs where everyone gets you are nothing more than a chirping little troll. But keep it up and we are all laughing at you.

  13. Macroduck

    Way off topic –

    In late November of last year, the Government of Egypt reported that 370,000 Sudanese refugees and “over 8,504” third country nationals have sought refuge in Egypt, as a reult of hostilities fighting that began on the 15th of April in the region. More arrive every day, so let’s round up to 400,000. That’s probably low, given that Egypt counted 40,000 arrivals in November alone.

    Egypt has been constructing a refugee camp in the Sinia, just next to the border with Gaza, which is estimated to be able to house roughly 100,000 refugees. That’s less than 5% of Gaza’s population, but assuming border controls hold up, Egypt can exercise good control over the number of refugees from Gaza.

    So Egypt is probably going to have over half a million refugees soon. The sad facts are that Egypt is poor and that refugees, once they end up in camps, tend to stay there. Sudanese refugees are not ending up in camps, to the best of my knowledge. I’m not aware that much is being done for them, except perhaps by UN agencies. They head for Cairo, the highest concentration of food, shelter and employment in Egypt.

    It goes without saying that there is big change underway all around the Gulf and the Horn of Africa. Somalia, Ethiopia, Eritrea, Egypt, Yemen, Israel Syria, Iraq, Iran and Palestine are all on the front lines. Israel’s war on Palestinians has given the Houthi organization a new goal, which means fresh funding to keep them going. Turkey and the Gulf monarchies are taking sides, as are the U.S., the Brits, the French and, to a limited extent, the Chinese. Two wars began last year (I may have missed some) which unsettled an already unsettled situation.

    Every government sees people on the move as a threat to stability. That’s why Egypt has refused to take Gazan refugees till now, and why it is preparing to contain refugees as near to Gaza and far from urban areas in Egypt as possible. War, drought and famine are going to keep people on the move. Meanwhile, Egypt is keeping construction of a refugee camp out of domestic news reports due to concern over domestic backlash – building a refugee camp could look like accommodation of Israel’s goal of pushing Gazans off their only remaining land.

    I have no prescription. With the U.S. withdrawal from Afghanistan, Biden declared the U.S. to be out of the business of constant military intervention. That is among the best of Biden’s policy intentions. Intentions can be overturned. Putin invades Ukraine, we help Ukranians. If China attacks Taiwan, we’ll help Taiwan.

    The U.S. has a long history of intervention in the Middle East. Pulling out of a long-standing activity is like playing Jenga; you don’t know which stick is critical to stability. Whether Biden’s declared reluctance to intervene was one reason Putin felt he could re-invade Ukraine, I do not know, but it is an obvious possibility.

    One way or another, the near term looks bad for Palestinians, bad for Egypt, bad for Somalians, bad for Eritreans and tough for policy makers.

  14. pgl

    Nazis mingle openly at CPAC, spreading antisemitic conspiracy theories and finding allies

    Nazis appeared to find a friendly reception at the Conservative Political Action Conference this year. Throughout the conference, racist extremists, some of whom had secured official CPAC badges, openly mingled with conference attendees and espoused antisemitic conspiracy theories, according to NBC News. The presence of these individuals has been a persistent issue at CPAC. In previous years, conference organizers have ejected well-known Nazis and white supremacists such as Nick Fuentes. But this year, racist conspiracy theorists didn’t meet any perceptible resistance at the conference where Donald Trump has been the keynote speaker since 2017. At the Young Republican mixer Friday evening, a group of Nazis who openly identified as national socialists mingled with mainstream conservative personalities, including some from Turning Point USA, and discussed so-called “race science” and antisemitic conspiracy theories. One member of the group, Greg Conte, who attended the deadly 2017 Unite the Right rally in Charlottesville, Virginia, said that his group showed up to talk to the media. He said that the group was prepared to be ejected if CPAC organizers were tipped off, but that never happened. Another, Ryan Sanchez, who was previously part of the Nazi “Rise Above Movement,” took photos and videos of himself at the conference with an official badge and touted associations with Fuentes.

  15. Econned

    “We then develop alternative measures of inflation that include borrowing costs and can account for almost three quarters of the gap in US consumer sentiment in 2023.”
    -Bolhuis et alia (2024)

    1. pgl

      The Cost of Money is Part of the Cost of Living: New Evidence on the Consumer Sentiment Anomaly
      Marijn A. Bolhuis, Judd N. L. Cramer, Karl Oskar Schulz & Lawrence H. Summers

      Unemployment is low and inflation is falling, but consumer sentiment remains depressed. This has confounded economists, who historically rely on these two variables to gauge how consumers feel about the economy. We propose that borrowing costs, which have grown at rates they had not reached in decades, do much to explain this gap. The cost of money is not currently included in traditional price indexes, indicating a disconnect between the measures favored by economists and the effective costs borne by consumers. We show that the lows in US consumer sentiment that cannot be explained by unemployment and official inflation are strongly correlated with borrowing costs and consumer credit supply. Concerns over borrowing costs, which have historically tracked the cost of money, are at their highest levels since the Volcker-era. We then develop alternative measures of inflation that include borrowing costs and can account for almost three quarters of the gap in US consumer sentiment in 2023. Global evidence shows that consumer sentiment gaps across countries are also strongly correlated with changes in interest rates. Proposed U.S.-specific factors do not find much supportive evidence abroad.

      It is a shame that little Econned refused to provide either a decent reference or a link to anything. After all this is an interesting paper even if it will make JohnH insane.

      Hey Econned – are you so mentally incompetent that you cannot ever provided a proper reference?

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