November 12, 2012

WHY DO PEOPLE SAY INFLATION IS WORSE THAN THE GOVERNMENT SAYS IT IS?

There are a couple of hypotheses that could be advanced to explain results like this. One is that the conspiracy crowd is correct, and the official statistics are rigged and vastly understate true inflation. But that wouldn’t get us anywhere near an understanding of why survey responses about inflation would be systematically different across men and women, higher- and low- income individuals, and just about any other demographic cuts we might make.

A second possibility it is that individuals’ responses reflect price changes in their own personal market basket, which may differ from that of the average urban wage earner whose habits are reflected in the Consumer Price Index (CPI). That might explain why any demographic sub group could arrive at different inflation perceptions, but it doesn’t explain why respondents as a whole systematically overstate inflation relative to the CPI.

I think the most likely explanation is that the survey respondents are expressing a much different concern than whether they believe food, gas, autos, banking services, or whatever are increasing or are likely to increase faster than the official statistics indicate. My guess is that they are telling us that they are concerned that their real — or inflation-adjusted — incomes are not rising fast enough to comfortably sustain their desired spending.

How’s that hopey-changey stuff workin’ out for ya?