Americans should be feeling optimistic about their financial situation and the economy.

Stock prices have recovered somewhat from last week’s downturn, prompted mostly by disappointing job numbers for July. The S&P 500 index is currently 58% higher than it was before the pandemic, and total household wealth has surged nearly 40%.

The unemployment rate sits at a low 4.3%, despite last month’s uptick.

Average wage growth has exceeded increases in consumer prices for over a year, allowing households to have more buying power than they did in 2019, before the COVID-19 pandemic hit.

So, what is causing the persistent gloom?

Just one word: Inflation.

Even though the rapid price increase triggered by the pandemic has significantly slowed, Americans are still focused on the cumulative rise in expenses they’ve experienced since the health crisis began, especially for necessities like food and gas, according to economists. New data indicates that consumers have become more sensitive to prices recently, despite the easing of inflation, likely because their savings accumulated during COVID have diminished.

“Simply not seeing prices rise any longer does not satisfy consumers,” particularly those in the lower and middle-income brackets who have felt the effects of price increases the most, explained Scott Hoyt, an economist at Moody’s Analytics. “They want to see prices fall, but that isn’t happening.”

Why is consumer confidence crucial to the economy?

People’s perceptions of inflation are significant because these attitudes can influence their spending habits, which account for 70% of economic activity. Even though spending growth has slowed, it has remained steady thus far. Moreover, these views may have implications for Vice President Kamala Harris as she campaigns against Donald Trump for the presidency, as voters’ concerns about inflation during President Joe Biden’s time in office may weaken her prospects, while the recent slowdown in price increases offers little political advantage, Hoyt suggested.

What is the current inflation rate?

The annual inflation rate has decreased from a peak of 9.1% in mid-2022 to 3% in June, as reported by the Labor Department’s consumer price index. The report for July, set to be released on Wednesday, is anticipated to show overall inflation holding steady at 3% for that month, while a core index that excludes volatile food and energy categories is expected to dip slightly from 3.3% to 3.2%.

In the meantime, the closely monitored consumer confidence index remained stagnant, stuck in the same moderate range it has been for the past two years, well below pre-pandemic levels.

“Although consumers are generally optimistic about the job market, they continue to express concerns about higher prices and interest rates,” noted Dana Peterson, chief economist at the Conference Board, referring to the findings from their July survey.

Americans do have increased purchasing power. While inflation overall has risen 22.6% from May 2019 to May 2024, average hourly pay has increased by 25%, according to Labor Department statistics.

Yet, many do not truly feel this benefit.

How much have prices surged since the pandemic?

“What is troubling consumers is the rise in prices compared to the last few years,” Hoyt commented in a report. “While overall retail prices have increased marginally by 0.1% over the past year, they have surged by 17.4% over the last five years,” contrasted with a mere 2.6% rise in the five years prior.

Moreover, essential expenses like gas and groceries have risen more sharply than non-essentials such as clothing and furniture, as shown by Hoyt’s analysis. Over the past five years, gas prices have climbed by 29%, groceries by 24%, and restaurant meals (which many consider a necessity post-COVID lockdowns) by 31%. Although drugstore prices have seen modest increases in the last five years, they experienced a significant rise of 2.2% in the past year, according to Moody’s and Labor statistics.

In contrast, the prices of appliances and electronics have decreased by 19% since 2019, and the costs for vehicles, furniture, and clothing have also seen a decline over the past year as pandemic-induced supply chain issues have been resolved.

However, rather than satisfying consumers, “In some ways, that makes it worse,” says Hoyt. “They wonder, ‘Why can’t the prices for food and everyday items drop like those other products?’”

‘I didn’t rush to change my life’

A couple of years ago, when prices surged, Lynn Gottlieb from Seattle reduced her fish dinners from five nights a week to two, replacing the other meals with beans. She also limited dining out to once a month instead of weekly takeout.

“Restaurant prices have skyrocketed,” shared Gottlieb, 72, a retired IT worker who stepped back from her job two years ago.

With rising airline fares, she eliminated her usual biannual trips to destinations like Phoenix, San Francisco, and New York.

Now that prices are stabilizing, Gottlieb has increased her fish meals to three times a week, but she continues to avoid dining out.

Even though retail prices have eased, Gottlieb mentions that her property taxes—along with health, homeowner, and auto insurance—have surged, keeping her in a budget-conscious mode.

“I didn’t rush to change my lifestyle because some expenses aren’t budging,” she remarks.

How do individuals respond to inflation?

Americans’ shopping behavior shows a continued sensitivity to prices, even as inflation moderates, according to a recent report from Bank of America. The bank notes that while the average credit and debit card spending per household rose by about 1% in July compared to a year prior, overall spending value fell by 0.4%, as reported by economist Joe Wadford from the Bank of America Institute, which studies consumer habits.

This information—and an analysis of shopping trends—indicates that many shoppers are moving from premium and mainstream stores to discount retailers, Wadford added. They are also opting for generic or store-brand items over name brands, especially in groceries and clothing. Additionally, they are choosing fast-food or other limited-service options over full-service restaurants.

“Consumers are willing to downgrade to stretch their dollars further,” he explains.

According to a study by Morning Consult, the practice of trading down peaked with inflation in 2022 but remains more common this year than in 2023, despite a slowdown in price increases.

Did Americans save money during the pandemic?

Wadford pointed out that there has been a significant drop in pandemic savings, which has reduced the financial buffer households relied on to manage high inflation. Bank of America Institute data shows that average bank deposits are 40% higher than pre-pandemic levels but 23% lower than their peak in 2021.

According to a study by the Federal Reserve Bank of San Francisco, the additional $2 trillion that Americans saved from stimulus checks and staying home during the COVID-19 pandemic has largely been depleted.

This trend of trading down is particularly noticeable among Generation Z (ages 12-27) and millennials (ages 28-43) as they move out or start families, Wadford noted.

While this approach helps them get more for their money, it doesn’t necessarily alleviate their concerns about inflation, according to Hoyt.