The damage of the economy's 'temporary burst of inflation' could stick around for years to come, says Paul Krugman

• The US economy defied most inflation and employment recovery predictions.
• However, economist Paul Krugman argues inflation created lasting psychological and political damage.

Inflation is coming back down, but it may still have a years-long impact on American morale — and our politics.

The US economy has defied most predictions about how it would recover from painful inflation, economist Paul Krugman wrote in a recent op-ed for The New York Times, yet the real damage has little to do with jobs or prices. Instead, inflation, which now sits around 3.2% as of July, has had lasting psychological and political damage, Krugman argues.

Though American perceptions of the economy are improving, there still exists a major disconnect between how the public perceives the economy and how the economy is actually performing. A new Quinnipiac University poll of over 1,800 adults found 71% of Americans described the economy as poor or not so good. Meanwhile, Goldman Sachs predicts there's just a 15% chance of a recession over the next 12 months.

Some have deemed this the "vibecession," caused in part by the shock of higher prices after a period of stability. That shock may be blinding many people to a slew of positive economic data.

"At this point, however, it's more or less impossible to deny that there's something strange about the public's negative view about a very good economy," Krugman wrote.

The negative view many have of the economy could hurt Biden and Democrats in the upcoming election. Biden and Trump are polling at very similar levels, with a recent Wall Street Journal poll showing 39% of registered voters viewed them favorably, compared with 58% who viewed them unfavorably. It's still very early in the campaign cycle, though with many Americans still asserting the economy is hurting, the political sphere may continue heating up.

Despite the economy's 'remarkable progress,' the pain of inflation still haunts Americans

In the first year or two of the pandemic, many leading economists across the political spectrum blasted President Joe Biden's economic policies, with some noting that the Federal Reserve erred in not raising interest rates in 2021 when inflation first reared its head. Many predicted inflation would skyrocket and not come way down without years of high unemployment.

But with a strong labor market and unemployment levels remaining at around 3.8%, there's little argument that the economy is undergoing what Krugman calls "remarkable progress." In fact, although many European countries were hit harder by the Russian invasion of Ukraine, the US has lower inflation than many of its European peers.

The pandemic altered supply chains and shifted Americans' demands from goods to services, though Krugman argues a "temporary burst of inflation" was what was necessary to respond to these sudden shifts.

According to the personal consumption expenditure deflator, the Fed's preferred inflation indicator, inflation fell below 3% for the last three months, well below last year's rate. The rate continues heading toward the Fed's 2% target, though, as Krugman writes, many still perhaps incorrectly say "there remains a lot of work to be done."

The drastically high levels of unemployment many economists predicted two years ago are nowhere to be seen, as unemployment levels matched pre-Covid levels within three years — in comparison to over a decade following the 2008 recession.

Additionally, despite higher prices compared to 2019, wages have outpaced price increases. The real wage of the average worker, calculated by dividing average hourly earnings by consumer prices, increased from pre-pandemic levels.

There is still disagreement over whether the Fed should have moved sooner on interest rates and if it would have made a difference, pushing some to still hold a critical view of the Biden administration's economic policies. Some have also pointed fingers at Biden over fiscal stimulus spending. Though, Krugman argues, the Fed raising rates quicker likely would not have an impact on the American economy — nor would it improve political attitudes.