Economist Justin Wolfers says pessimism about the economy has hit an all-time high, even though history suggests it shouldn't be. The University of Michigan professor took to X to make his case, pointing to the 1980s as a time when wages eventually caught up after painful inflation.
"Pessimism is at an all-time high. History suggests it shouldn't be," he wrote. He added that even after the sharp, double-digit inflation of the 1980s, wages eventually caught up, arguing that while inflation hurts, economies adjust over time and real wages recover.
In his blog 'Platypus Economics', Wolfers said measures of real wages show pay has caught up to or exceeded pre-2022 levels, and that the median worker's raise has outpaced inflation over the past year.
So why the disconnect? Wolfers says it comes down to psychology. Most people experience "a boss," not "the labor market," and assume employers won't raise pay even as profits grow.
Sentiment Hit a Fresh Low
The University of Michigan's Consumer Sentiment Index fell to 51.0 in August, down from 55.2 in July, ending two consecutive months of improvement. Only 8% of consumers now expect their income to outpace inflation over the next year, and nearly three-quarters expect prices to rise faster than their pay.
Wage growth has trailed inflation for four consecutive months, according to a Business Insider report.
Inflation Has Been Cooling, Even if It Doesn't Feel Like It
July's Consumer Price Index rose just 0.1% month-over-month, pulling annual inflation down to 3.4% from 3.5%. Even so, grocery prices have climbed 32% over the past five years, and more than a quarter of working-age adults who used credit cards to buy groceries either couldn't pay their balance in full or missed a minimum payment, according to Urban Institute research.
Wolfers acknowledged that the current moment carries a caveat of its own, noting that supply shocks, including the war with Iran disrupting oil flows, can make real wages fall even as historical patterns suggest most inflationary periods correct over time.
