Inflation, financial pressures lead more Americans to believe they need more in retirement savings

The labor market is roaring ahead, wages are rising and inflation is slowing — all key metrics that economists point to as showing a resilient and strong U.S. economy. The problem is Americans aren't feeling it. 

The disconnect between gloomy consumers and upbeat economic data has sparked plenty of debate over the gap, with some experts terming it a "vibecession." The idea behind the term is that Americans are basing their economic views on "feelings," rather than on what's actually happening in their financial lives.

For instance, inflation has come down a long way from its 40-year peak of 9.1% in June 2022. But about 3 in 4 consumers in swing states said they believe inflation is going the "wrong way," according to a recent Wall Street Journal poll.

But there may be more than vibes behind Americans' dour views, such as financial pressures that aren't necessarily captured by data like the consumer price index, which measures the pace of inflation. For instance, the CPI doesn't capture the impact of higher borrowing costs ushered in by the Federal Reserve's 11 rate hikes to battle the hottest inflation in 40 years. 

In other words, consumers are paying more for credit card debt and loans, but that's not directly reflected in the CPI, which measures commonly purchased goods and services like groceries and clothing. Credit card debt reached a record $1.13 trillion in the fourth quarter, the highest since the Fed started tracking it in 1999.

"There are things that are intentionally excluded from the CPI — credit card costs are not in it," noted Kayla Bruun, senior economist at Morning Consult. "It's a big burden on the cost of living."

It's an issue that was underscored by former Treasury Secretary Larry Summers in a February research paper, with Summers and his co-authors pointing out that borrowing costs have surged "at rates they had not reached in decades." That is boosting anxieties among Americans about the cost of financing major purchases, from cars to houses, the paper noted.

Consumers are likely going to cope with high borrowing costs for a while longer. While the Fed is expected to cut interest rates later in 2024, recent economic data and persistently sticky inflation has prompted some economists to forecast that the cuts could come later in the year. 

One Fed official last week raised the possibility the central bank may not cut interest rates at all in 2024, which suggests consumers and businesses may not get much relief on the borrowing front anytime soon.

Inflation and loss aversion

The pace of inflation will get a reality check on Wednesday, when the latest consumer price index data will be released. Economists expect prices in March rose 3.4% on an annual basis, reflecting a slight uptick from the prior month's 3.2% rate, according to financial data firm FactSet.

While inflation has undeniably eased from its recent 2022 peak, inflation seems to moving sideways, according to a new report from Morning Consult. The recent inflation data is also higher than the Fed's goal of returning to an annual inflation rate of 2%, and Americans continue to point to the issue as a top economic concern. 

Some economists have pointed to wages that are now growing faster than the rate of inflation as a reason Americans should feel positive about the economy. But that ignores how consumers view prices — and the psychological impact of loss aversion, or why losing something (or paying more money for goods or services) makes a bigger impact than the equivalent gain, Bruun said.

"Consumers seem to be more bothered by prices than they feel the benefits of their wages increasing, psychologically," Bruun noted. "My team's theory on this is it comes down to loss aversion: you feel the sting of having to part with your money rather than the boost in your income."

And Americans may be describing inflation as going in the "wrong" direction, even though it is in fact receding, because of their experiences with making purchases, Bruun noted. 

"Consumers look at prices and see prices are up, and if you are asked, 'Is inflation up or down from a year ago?' they know prices are up from a year ago, and so they'll say, 'Prices are going up, and that means things are getting worse'," she noted. 

Even though inflation is cooling, prices are continuing to rise, albeit at a slower pace than in the post-pandemic inflationary surge. It's likely that consumers will eventually get used to these higher price levels, but that could take some time, Bruun added. 

"When people realize, 'Okay this is what things cost now' and realize they can afford it," the gap between economic data and Americans' views on the economy could close, she predicted.

In:
• Inflation

Aimee Picchi

Aimee Picchi is the associate managing editor for CBS MoneyWatch, where she covers business and personal finance. She previously worked at Bloomberg News and has written for national news outlets including USA Today and Consumer Reports.

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