Transcript Stefanie Stantcheva: Why do people dislike inflation?

00:02 As economists, we tend to think that in the short run, there is a trade off between inflation, which might be considered a bad thing, and good things like more employment, higher demand, higher growth. And this short run trade off is not something that people see. They tend to associate inflation with stagflation episodes where there’s both high unemployment and high inflation, which of course do happen historically, but is not the only, situation.

00:29 Another thing that we think as economists, is that over the longer run, eventually, wages will catch up with prices. But again, this is not something that people perceive. They think it’s going to take a really, really long time for their wage to catch up, if ever, and so they’re really worried about their declining living standard. So there are two questions that we tried to answer with this research.

00:49 The first is ‘Why do people dislike inflation so much?’ What are the reasons? How do they feel about it? And the second question is ‘How do people understand inflation?’ What do they think causes it? What do they think the consequences are?

01:06 The method we use is large scale socioeconomic surveys and experiments. So these are surveys in which we really do a deep dive into how people think. We ask them directly about their understanding, their reasoning, their preferences, their policy views, their attitudes. These are things that are invisible and other data, no matter how good it is, compare this to other things like income or unemployment status or family situation. These are statistics that we can get, from other data. For instance, high quality administrative tax data or social security data.

01:41 So there’s two related surveys on inflation. They each have around 3000 respondents, that are representative of the US population. So these are people who are intentionally selected so that we have broad representativity across income, across gender, across different age groups. So you can view it as a snapshot of current US population views.

02:06 The answer to the question ‘Why do people dislike inflation?’ is very simple. They think it erodes their living standard. They feel like their wages just don’t keep pace with prices. And, in fact, they believe that if their wages are not growing, it’s because their employers choose to not increase them, so that employers have a lot of discretionary power rather than being subject to market forces.

02:26 The second question, which is much broader, has a lot of findings. The first is that people believe that the main cause of inflation is government spending and government debt. On the consequences of inflation, people tend to believe it decreases their living standard and just makes household budgeting decisions so much harder. People don’t perceive the same trade-offs as economists do. So inflation in people’s minds is always associated with a bad economy. It is never associated with a booming economy where high demand leads prices to increase. But it’s always associated with this idea of stagflation, where there’s higher unemployment and higher inflation and those type of scenarios. And as a result, people tend to have very little support for traditional monetary policy action to reduce inflation, such as increasing interest rates

03:14 In the data, we can ask about people’s political leaning and who they voted for. And what we can see is that political leaning does have an effect on your views about inflation. So for instance, if you are more right leaning, you will tend to attribute, you know, the cause of inflation to be the government and government spending, much more so than if you are left leaning. On the other hand, if you’re left leaning, you’re going to try to attribute it more to companies increasing prices. And this idea of greedflation. So there are clear differences by political leaning. Although across the board people dislike inflation and tend to believe it’s a bad thing.

03:53 One of the things these results tell us is that it would definitely be great to have more economics education and that’s not just true for inflation. This is true for many other topics. We’re asked as citizens to take a stance on policies that deeply affect our lives and yet we receive basically no education on it. But the other thing that these results tell me is that we economists have a lot to gain from listening more to people. For instance, to me, the fact that people are very worried about their wages also tells me that perhaps our official statistics are a little bit imperfect.

04:24 We tend to use an average CPI index to measure inflation. It doesn’t take into account people’s consumption baskets based on their income, which could be very different. So this idea of inflation inequality, and it is also not taking into account many other costs that people perceive to be part of their cost of living, such as financing costs. So to me, the learning goes very much in the other way too. We economists have just a lot to learn about how people think about this.