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June 30, 2022, 12:23 p.m. EDT

Why are Americans so grumpy about the economy? They’ve never lost so much purchasing power in one year, as the stimulus dries up and inflation boils over

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By Rex Nutting

If you want to know why Americans are so grumpy about the economy, let’s start with the fact that despite strong job growth and sizable increases in wages, their incomes are simply not keeping up with inflation.

Americans just don’t feel poorer—they are poorer. In fact, they have never lost so much purchasing power in one year.

And if you think that our inflation crisis stems from “too much money chasing too few goods,” you should breathe easy now that American families are no longer getting all that money from Uncle Sam and Uncle Joe. Inflation will surely fade away now, right?

Probably not. My view is that inflation has more to do with supply issues than with excess demand. I think inflation will stay high until the supply constraints are resolved or the economy crashes.

Here are the data:

Real disposable incomes—how much is left after subtracting taxes and inflation—fell at a 7.8% annual rate in the first quarter of the year, the Bureau of Economic Analysis estimated Wednesday. A drop of that magnitude is virtually unheard of outside of recession.

Read more about the GDP report: U.S. first-quarter GDP shrank 1.6%. The second quarter isn’t looking much better for the economy

It gets worse. Real disposable incomes have fallen in each of the past four quarters and were down 12% from a year earlier as of the end of March, a decline that shattered the prepandemic record of -2.6% set in 1974.

Incomes after taxes and inflation fell 0.1% May and were lower than the first-quarter average, the BEA said Thursday.

Incomes have plunged by $2.5 trillion since March 2021. The extraordinary drop in real incomes can be primarily explained high inflation and by the income that was lost by the expiration of several federal tax and spending programs designed to provide relief to struggling households and businesses during the pandemic.

Now, a lot of people think this drop in incomes is a good thing, because they believe that our current inflation problems were brought on by the government giving people too much money in the form of higher unemployment checks, widespread stimulus checks, expanded Medicaid, the monthly child tax credit, and various other tax and spending programs.

The stimulus worked, but did it work too well?

That relief was credited with keeping millions of people out of poverty as the economy shut down and slowly reopened during the COVID pandemic in 2020 and 2021. The payments kept families fed, sheltered and clothed. But many critics say the extra cash fueled the inflationary pressures that have pushed consumer prices up by 6.3% in the past year (as measured by the same price index that the BEA uses to calculate real disposable incomes).

Our inflation is simply a matter of too many dollars chasing too few goods and services, they say.

Most of those government programs have now been dropped or scaled back. Transfer payments from the government have fallen by $2.5 trillion since peaking in March 2021, with almost all of that loss hitting poor and middle-class families.

Meanwhile, taxes paid have risen by $500 billion, fed by capital gains booked after yet another year of double-digit gains for S&P 500 /zigman2/quotes/210599714/realtime SPX -0.16% , bracket creep and the expiration of the child tax credit and other temporary tax provisions. Taxes rose to 14.4% of personal income in the first quarter, just a tick off the record of 14.5% seen in 2001.

But while the government has stopped giving American families “too many dollars,” it doesn’t mean our inflation problem is necessarily licked, the Fed and others say. Because American families saved a lot of money (somewhere between $2 trillion and $4 trillion) during the pandemic, they have plenty of cash to spend, even though their incomes have fallen.

The latest word from the Fed: Powell says no guarantee of soft landing for U.S. economy

Fed Chair Jerome Powell endorses this view, arguing that the economy is in good shape and can handle the expected higher interest rates /zigman2/quotes/210002368/delayed FF00 +0.0051% /zigman2/quotes/211347051/realtime BX:TMUBMUSD10Y -1.07% because households are in strong financial shape with plenty of cash saved up.

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