Inflation: Maybe it’s all in our heads

Sabri Ben-Achour Dec 13, 2019
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Alex Wong/Getty Images

Inflation: Maybe it’s all in our heads

Sabri Ben-Achour Dec 13, 2019
Alex Wong/Getty Images
HTML EMBED:
COPY

It’s a real puzzle why inflation doesn’t seem to be much of an issue, given that the unemployment rate is at a 50-year low and wages are rising in some parts of the country. 

One theory about why that’s the case: Inflation may not be rising because we don’t think it’s rising. 

“People and business — when they are making their decisions — don’t think about inflation nearly as much as they used to,” said Alan Detmeister, an economist at UBS who used to research inflation for the Federal Reserve.

He said that’s because people haven’t had to think about inflation for a while.

“Inflation has been low and stable for most of the last 20 to 30 years,” he said.

And the fact that people don’t anticipate inflation may itself be limiting inflation.

“That will become a self-fulfilling prophecy,” said Ricardo Perez-Truglia, who teaches economics at UCLA. 

If store owners think prices won’t rise or that increases are just a blip, they may be hesitant to raise prices. And if it’s been decades since inflation was scary, they may not even bother going to the trouble of adjusting all their prices very often. 

And if everyone’s doing that, Perez-Truglia said, “When you look next month, you see prices haven’t changed, and you say, ‘Oh, I was right all along! Inflation was going to be low!'”

This is one of those things that’s hard to test in economics, but economists have used the principle in reverse when inflation was out of control: They’ve tried to tame people’s expectations, and historically it’s worked. 

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