…consumer psychology may play an outsized role in fomenting inflation…

12/11/2021 lakodabluedingo December 2021 Leave a comment

When asked to quantify their inflation perceptions and expectations, consumers, on average, tend to report significantly higher figures than actual inflation.

Is there an economic term that strikes more fear into the hearts of consumers than “inflation”?

Probably not. When inflation is rising even modestly, it becomes Topic A in the press, on cable news and over the proverbial backyard hedges and dinner tables.

…inflation is an inherently complicated subject — its causes are tangled, its effects variable. Consequently, it lends itself to confusion and misunderstanding…

More to the point, consumer psychology may play an outsized role in fomenting inflation, for consumer behavior inspired by inflation fears contributes to the phenomenon by prompting more spending or less spending, as the case may be.

increase in production costs or an increase in demand

Cost-push inflation occurs when prices increase due to increases in production costs, such as raw materials and wages.

There is mounting evidence that the American consumer’s supercharged spending habits are playing at least as big of a role in stoking higher prices as the bottlenecks of imported goods in West Coast ports.

Demand-pull inflation can be caused by strong consumer demand for a product or service.

Wages also affect the cost of production and are typically the single biggest expense for businesses.

Households have amassed more than $2 trillion in excess savings during the coronavirus crisis — thanks to the lockdowns during which spending was curtailed, the unprecedented stimulus money from the government and the boom in equities and housing values. At the same time, as shown in a government report Friday, the labor market is strengthening, with hiring and wages rising.

GAZETTE: How much of a role does consumer psychology play in inflation trends? Can fears that prices will become out of reach help drive up inflation in some sectors?

So in the social psychology sense, inflation adjustments are very slow. Right now, the way the job market is very strong in many, many areas, there’s a lot of upward pressure on wages. Some of that’s inflation. Consumer surveys and all evidence we have is — there may be some op-ed writers panicking about it and they may be right — but if you ask Joe Public, they’re not there yet.

…does media coverage about rising prices and uncertainty over how long the prices will keep going up contribute to a negative mindset that also helps keep inflation higher?

Yes, if it’s a shortage of something…

increase in production costs or an increase in demand

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