Feeling inflation that the Fed says isn’t there

December 7, 2010 in Blog posts | 2 comments

The Fed says the inflation rate over the last year is 1.2 percent, but a survey says consumers think it’s at 3 percent. The WSJ looks at people’s mental accounting of inflation. Some highlights.

  • “(People) pay more attention to the prices of things they buy frequently, or to prices that fluctuate a lot, such as gasoline and meat. In a Bank of England survey, consumers identified household energy, gasoline, transportation, food and drink as the top influences on their perception of inflation. In the U.S. last year, prices rose sharply in all of those categories, with the exception of food and drink.”
  • “A recent paper in the Journal of Consumer Affairs suggests that inflation expectations tend to be higher among people who are older, poorer or less-educated. A study by Cleveland Fed economists found inflation perceptions to be about 50% higher among women than men.”
  • “Outside of housing, middle-income consumers have experienced more inflation than other income groups over the past year, in part because they devote a relatively large share of their budget to energy and transportation. For the year ended in October, prices on the items consumed by the average middle-income household rose 2.1%, compared with only 1.8% for households with income of $150,000 or more, according to a Wall Street Journal analysis of Labor Department data.”
  • “Geography matters, too. Prices in western U.S. states rose only 0.6% in the year ended in October, compared with 1.5% in the Northeast and Midwest.”

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  • Anonymous

    I believe it is inaccurate to say this is the result of flawed mental accounting. Rather, I think it’s the result of a skewed purchasing distribution. Everyone buys fuel, but not everyone buys diamond necklesses. Therefore, even if deflation occurred in diamond necklesses to balance the price effect of inflation in fuel, more individuals would (correctly) perceive that their personal inflation rate was high. Because the fed models the aggregate of the economy, they also (correctly) say that inflation is zero.

    Another way to say this is that inflation in fuel is highly regressive while inflation in diamond necklesses is not. Think taxes. If you increased taxes only on luxury goods, most people would say that taxes are unchanged, but a sales tax… Or one just on gas… Is perceive by a lot more individuals as an increase.

  • Nosybear

    You’re right in the individual case, it’s mental accounting. I pay attention to the things I buy. Stores do, too, that’s why they never mess around with the price of things like milk. But I’ve also read economic studies that indicate the Government routinely under-reports inflation by about 50%, indicating our mental accounting may not be that wrong. Also, the reported rate, the “core” rate, doesn’t include food and fuel. Aren’t those two things people can’t do without? Most people won’t use a hotel room or an airline this quarter (included in the figure) but they will buy gas and food (not included). The inflation rate itself is a nudge, designed by the Government to keep from paying cost of living increases to social security recipients and to give the appearance of a healthy economy. Our mental accounting isn’t that wrong after all, it seems.