What do people think causes inflation?
What causes inflation? Economists have some ideas — namely, when demand broadly outstrips supply and prices rise. It turns out, the general public doesn’t always see eye-to-eye with economists on why inflation happens or on how to fight it, according to the results of a survey published recently by the National Bureau of Economic Research.
Most people surveyed said government spending causes inflation. That can be a factor, depending on the program.
But when asked what kind of government spending they’re concerned about, “people think that foreign aid from the United States is the number one source of inflation. It’s a joke,” said Yuriy Gorodnichenko, an economist at UC Berkeley.
There’s no evidence that foreign aid has caused higher prices in the U.S., he said. But Gorodnichenko is not surprised about discrepancies like this. Because “economists are not people, and people are not economists.”
Or at least, people don’t always think like economists — who measure inflation using tools like the consumer price index, per Stefanie Stantcheva, an economist at Harvard who led the survey.
“The CPI, you know, the way we measure inflation is really highly imperfect,” she said. “It doesn’t capture the fact that different people consume different baskets of goods. And so people have a very valid lived experience that just sometimes doesn’t align with our official statistics.”
Most respondents also said raising interest rates will increase inflation. That — to be clear — is the exact opposite of economic orthodoxy, which says if you make it more expensive to borrow money, consumer demand drops, and — in theory — that should help bring prices down. So, why do so many people think rate hikes lead to higher prices?
“When we live in environments of high inflation, we tend to see interest rates go up. And so the causality might not be clear, right?” Stantcheva said. “We see a correlation that’s there, and it might be difficult to trace the causality.”
One solution, argues Francesco D’Acunto, a finance professor at Georgetown, who studies how people understand inflation: “Fine tune the communication of policymakers in a way that actually makes very clear what the objective of the policy is.”
In other words, better explanations from, say, the Federal Reserve about why it’s changing interest rates to keep inflation in check.
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