Bryan Caplan  

What Makes People Think Like Economists About Inflation?

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Tyler blogs this 2001 Bryan and Venkatu piece on systematically biased beliefs about inflation:
In the roughly 20,000 responses we have received from our telephone survey since August 1998, the average rate at which respondents thought prices had risen over the previous 12 months was about 6.0 percent. This "perception" of inflation is more than twice the rise recorded by the Consumer Price Index (CPI) over the same period (2.7 percent). Further, if we separate our sample by gender, we find that the average inflation perceived by the nearly 8,500 men who answered our survey was 4.6 percent. While this response is higher than the official CPI inflation estimate, it pales in comparison to the 6.9 percent inflation perceived by the roughly 11,500 women who took our survey. What accounts for such a large discrepancy between the inflation rate perceived by the two sexes?
The data indicate that the public's estimates and predictions of inflation are significantly and systematically related to the demographic characteristics of the respondents. People with high incomes perceive and anticipate much less inflation than people with low incomes, married people less than singles, whites less than nonwhites, and middle-aged people less than young people. This Commentary describes what is perhaps the most curious observation of all: Even after we hold constant income, age, education, race, and marital status, men and women hold very different views on the rate at which prices are changing.
Tyler proposes some typically nuanced explanations.  What amazes me, though, is how consistent Bryan and Venkatu's results are with my 2001 JLE piece, "What Makes People Think Like Economists?"  Namely:

1. The public is strongly biased in a pessimistic direction (thinking inflation is higher than it really is).

2. Women are more biased than men.  (More details in this unpublished piece).

3. The fact that higher income predicts less biased beliefs about inflation might seem incompatible with my JLE results.  But my finding that income doesn't make people think like economists only holds controlling for education.  Bryan-Venkatu says that the gender gap persists after controlling for education, but doesn't say whether or not the income result persists controlling for education.

Bottom line: As far as I can tell, there's nothing special about the public's systematically biased beliefs about inflation.  Instead of offering ad hoc explanations, economists and psychologists should step back, see the big picture of economic bias, and try to find some overarching explanations.

Comments and Sharing

COMMENTS (18 to date)
Tom E. Snyder writes:

Maybe the CPI doesn't reflect what these people buy. Maybe what they buy did experience 6% inflation.

Dan Hill writes:

@Tom E. Snyder - I think it is an even worse form of availability bias. People remember the things that increased in price but not the things that didn't or that got a whole lot better for the same price.

I can't explain the gender bias though. At least not in a way that won't banish me to the marital doghouse indefinitely. I suspect though gender differences in spending patterns explain at least some of it. Men on average will buy more technology, gadgets etc. where there is less inflation if not outright deflation going on.

Peter writes:

The rate at which prices rise is not the same thing as CPI. This study sounds completely useless. It's like asking the public questions about quantum mechanics to see how they are biased about that.

David N writes:

The CPI excludes food and fuel. Is it really surprising that the average person can't remove that "bias" in their head when answering a survey?

CC writes:
The CPI excludes food and fuel.

No it doesn't.

John Fembup writes:

Rather than wonder why there is a gender difference, isn't a better question why there would not be a gender difference? Isn't it at least possible that there is some natural gender bias?

Everyone does not buy the same goods and services in the same proportion as included in the so-called "market basket" of items in the CPI.

Do men and women place equal weight on the price changes of all items? Do men and women pay equal attention to the price of gasoline? Of rent? Do both genders buy a house every year? Does anyone buy a house every year? Do men and women make more frequent food purchases? Do both genders pay equal attention to the prices of food?

Salim writes:

People are notoriously bad at estimating small percentages (or large numbers). I wouldn't put any credence on these numbers unless they were asked alongside some other questions that reveal numeracy.

(Ask them, perhaps, what percentage of dogs have 3 legs, or what percentage of cereal boxes in the supermarket are defective, or what percentage of days in their city have snowfall.)

My prior is that older married white men are more likely to have exposure to actual CPI numbers and to 'small' numbers in general, and thus are more likely to give reasonable - if not accurate - guesses. People with less exposure to these kind of statistics are less likely to succeed, because humans have little innate fluency with small numbers.

Chris writes:

The CPI excludes food and fuel.
No it doesn't.

Thank you! Where in God's name do people get this idea? I don't mean to be insulting, but as I've posted elsewhere before, I genuinely am baffled how people can read news stories about CPI, which always report the CPI measure and then separately mention core CPI, which excludes food and energy, and then come away thinking CPI excludes these.

Ghost of Christmas Past writes:

Before you mock people who have noticed that the "cpi" doesn't jive with their experience, particularly with respect to food and fuel, just recall that the BLS really does cheat on those. For example, the BLS applies a clearly fraudulent "hedonic adjustment" to gasoline prices, excluding the costs of ethanol adulteration and oxygenate blending requirements even though those reduce quality (lower mpg and increase corrosion and in the case of MTBE, actually poison motorists) rather than improve it. The BLS adjusts its food basket to exclude items whose prices increase, on the excuse that shoppers buy cheaper substitutes without loss of utility(!).

Jack G writes:

My wife certainly "sees" inflation as fact based on the cost of groceries. Since I do not do the shopping I do not see these increases. Big ticket items I buy (thanks to Mohrs Law) often stay the same.

MingoV writes:

I agree with Ghost of Christmas Past. Another point is that in recent years food prices have gone up more than the CPI because of the diversion of corn to ethanol production. Corn prices skyrocketed, then other grain prices increased. Foods made from grains cost more. So do meats from animals fed corn or other grains (except for the recent dip in beef prices because ranchers are slaughtering many of their cattle because they can't afford to feed them over the winter).

Mark Brophy writes:

According to the Shadow Government statistics compiled by John Williams, men and women are underestimating inflation. He uses government data to calculate inflation the way the government did it 30 years ago. The government changed the formulas so that they could pay reduced pensions to retired government employees and to bamboozle the public into believing that inflation is under control. Have you checked out the price of gold, silver, copper, and oil relative to the dollar in recent years?

David N writes:

Sorry... You're all right about CPI and I'm wrong. I have no excuse.

However, I feel that recent happenings such as shrinking of juice containers (the "half-gallon" O.J. is now 59.5 oz.) create a stronger sense of inflation than is warranted, precisely because we don't as individuals make the effort to determine the actual unit price change. We just know that "inflation just happened."

Also, lots of people are experiencing stagnation of real wages, and perhaps they have trouble separating that fact from their experience that life seems to grow less and less affordable.

Ben Southwood writes:

@David N

CPI (at least in the UK) also includes reduction in sizes. In fact, one of the more significant – and interesting, so newsworthy – effects on the CPI rate in the most recent data (bringing the annual inflation rate up from 2.2% to 2.7%) was a market-wide reduction in chocolate bar sizes.

Chris writes:

According to the Shadow Government statistics compiled by John Williams, men and women are underestimating inflation. He uses government data to calculate inflation the way the government did it 30 years ago.

Shadowstats is just wrong. See here:

The sizes and effects of the changes implemented by the BLS have been overestimated by critics. The introduction of the geometric mean formula to account for product substitution has decreased the rate of change of the CPI by less than 0.3 percentage point annually, not by 3 percentage
points annually as some have claimed. In the case of owner’s equivalent rent, it is not at all clear that the long-run impact has even been in a downward direction. Hedonic quality adjustments introduced in the last 10 years have
had a very small impact on the all-items CPI.

Moreover, the shadowstats figures imply patently ridiculous things about the economy that are easily rejected. As I've said before

Ignore the current recession for right now. Even if you looked at the ten years prior to the recession, a annual seven percent misstatement of inflation (like on this graph from shadowstats) would imply a massive collapse in living standards. Real GDP per capita growth (by government figures) was almost exactly 2% from 1997 to 2007. Then take (1.02^10), and you see that total growth is ~22%. But what if inflation was understated by 7%? Then living standards would be going down by 5% a year. So then (0.95^10) ~59%. In other words, a 40% decline in GDP. And that's PRIOR to the recession.

Seriously, that's preposterous, and with no other information we can easily dismiss Shadowstats as lunacy. So no, bogus conspiracy theories on inflation calculation aren't going to save the reputation of the American public here either.

Joe Cushing writes:

This is really simple. Women buy most of the food. Food prices have really gone up and up and up on a couple of year trend so women perceive inflation more. I believe inflation to be much higher than official numbers too. We had a housing collapse and that shoved housing costs down for years while at the same time inflation is pushing all prices up. Those with other forces pushing down would have gone down more if it weren't for inflation.

The deleveraging in the economy that acts to temporarily reduce money supply and bring the housing prices down will end and the amount inflation the fed has pumped into the economy will show it's symptoms in the form of higher prices. When person catches the flue, we diagnose it through symptoms but we don't call the symptoms the flue. Inflation has happened, but the symptoms (rising prices) are in the incubation phase.

The Dirty Mac writes:

My first thought when I read this was that the people doing a greater proportion of spending on food and energy are going to overstate the official inflation numbers. The cost of a lot of basic staples have more than doubled since 1998. The people who design the packaging understand this. I went to the store today. Twelve ounces has replaced the pound as the unit of measurement for a number of products. Don't get me going on the 11.2 ounce beers. Excuse my anecdotal evidence, but these are little signs that inflation may be more than minimal.

John Fembup writes:

@Joe Cushing "the amount inflation the fed has pumped into the economy will show it's symptoms in the form of higher prices. When person catches the flue, we diagnose it through symptoms but we don't call the symptoms the flue. "

Yes - - with exceptions e.g., medical care and medical insurance where there is seemingly no end of confusing the symptom with the disease.

And @ Dirty Mac "Don't get me going on the 11.2 ounce beers" . . . the reason I (and my bride Stella) now choose another beer after lo! those many years.

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