Scott Sumner  

The public only thinks it likes low inflation

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Polls show that the public thinks it likes low inflation. But it doesn't. Thinking you like low inflation is reasoning from a price change, which is almost always a bad idea. Thus we should be very skeptical when the public claims to like low inflation. In fact, they like low inflation only when delivered via rising aggregate supply. The public absolutely hates low inflation that is produced by falling aggregate demand (i.e. tight monetary policy).
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Here's a graph showing the results of various public opinion polls on the economy:

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As you can see, the public's view of the economy fell sharply during the first half of 2008, as an adverse supply shock drove inflation higher. But by early 2009, inflation had fallen to roughly zero, the lowest level of my entire life (since 1955.) And yet the public's view of the economy continued to fall to extremely low levels.

Some would argue that I am not holding other things equal---unemployment was rising sharply during early 2009. That's true, but unemployment was rising sharply precisely because tight money was driving inflation down to zero. (It would be like saying the public doesn't mind falling out of 100 story buildings, just hitting the ground.) The public may say it likes low inflation, but it behaves as if it likes low unemployment. That graph tracks real GDP growth and the unemployment rate far more accurately than the inflation rate. Growth fell and unemployment rose in 2008 and early 2009, as the public's view of the economy was getting worse. Then it gradually improved as unemployment fell back and the economy recovered. In contrast, inflation today is higher than in 2009. As it rises, the public's view of the economy has improved.

In my view, there's no such thing as "public opinion" when it comes to inflation. To the public, the term 'inflation' means something very different from what it means to economists. Surveys showed that in 1990 most Americans thought inflation was higher than it had been 10 years earlier (it had actually fallen from 13% to 4%). Perhaps they confused "inflation" with "cost of living". Recently, inflation rose to 2%, and yet the public's view of the economy is now more positive than in many years.

If a central banker were to read a public opinion poll showing that people opposed inflation, and then decide to reduce the inflation rate to zero, they would be in for an unpleasant surprise. Whatever you think about "public opinion" and inflation, keep in mind that the public absolutely hates an economy with zero inflation produced by tight money. We saw that in 2009, and we'd see it again if the Fed suddenly drove inflation down to zero.

A commenter recently said the following:

I think the public is also sensitive to the fact that bouts of inflation seemingly hurt the most vulnerable. Those unemployed and/or on some sort of fixed income that is not inflation-adjusted.
Actually it's the unemployed who are helped the most by inflation, if it is produced by monetary stimulus. (Of course supply-side inflation hurts almost everyone.) Demand side inflation tends to generate jobs for the unemployed. As far as the "vulnerable" people with fixed incomes, they are typical not poor (AFAIK). The poor tend to rely on programs like Social Security, which is indexed to inflation. People with unindexed annuities are likely to be at least middle class.

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COMMENTS (10 to date)
Mlouis writes:

If nominal wages are sticky then doesn't anyone with a job benefit from lower inflation? Even in bad times that's a majority of the population.

E. Harding writes:

"The public absolutely hates low inflation that is produced by falling aggregate demand (i.e. tight monetary policy)."

-I agree with Mlouis. I think a lot of Americans probably appreciated the oil price drop in late 2008 and found it a personal boost to their finances. I sure did. They just didn't like the social effects of so many people losing their jobs.

Alex S. writes:

E. Harding: "I agree with Mlouis. I think a lot of Americans probably appreciated the oil price drop in late 2008 and found it a personal boost to their finances. I sure did. They just didn't like the social effects of so many people losing their jobs."

Yes, but the oil prices would have fallen once the supply shock that caused it dissapated. It would have been nice to avoid a massive demand-side contraction and a decade of economic malaise to follow it because the Fed loses its nerve.

Gordon writes:

As I was reading this post, I was thinking that it's unfortunate that there is not an inflation index that differentiates between good and bad inflation. And then I figuratively slapped myself in the forehead when I remembered such an index is irrelevant if the focus is on NGDP growth rather than inflation.

Scott, many times in the past you've pointed out the problems with measuring inflation. And you've pointed out how measuring NGDP is much easier and, therefor, NGDPLT is better than inflation targeting. That may have been in your mind when writing this post. But it probably would be good to explicitly state it even if it seems like beating a dead horse. Otherwise, I'm not certain people (and more importantly the FOMC) will move away from an inflation obsessed mindset.

Floccina writes:

When you talk about inflation to non economists they picture things getting more expensive and their wages staying the same.

foosion writes:

The public sees no relation between income and costs. Inflation is bad because it makes stuff more expensive. Any increase in income is due to personal virtue and has nothing to do with inflation or other macroeconomic factors.

In the public's favor may be distributional factors. If inflation affects everyone's spending, but income gains are concentrated in a few, then many people are hurt by inflation and are not helped by the attendant economic benefits. Spending equals income at the aggregate level, not necessarily at the individual level. This seems an empirical question.

Alex S. writes:

E. Harding: "I agree with Mlouis. I think a lot of Americans probably appreciated the oil price drop in late 2008 and found it a personal boost to their finances. I sure did. They just didn't like the social effects of so many people losing their jobs."

Yes, but the oil prices would have fallen once the supply shock that caused it dissapated. It would have been nice to avoid a massive demand-side contraction and a decade of economic malaise to follow it because the Fed loses its nerve.

Scott Sumner writes:

Mlouis, I did not benefit. In 2009, my wealth fell by far more than my real wages increased.

Also, workers tend to work fewer hours when inflation falls sharply, so even if their hourly pay rises in real terms, their weekly pay falls.

Harding, Polls show you are wrong, the public was very unhappy with the economy. Yes, falling oil prices are good, but falling core inflation really hurts the public.

Gordon, Good advice.

Floccina, Yes, and that means they are picturing supply side inflation, not demand side inflation.

foosion, For a demand side inflation look at the 1960s---which was a really good period for the public.

Jim Glass writes:

When you talk about inflation to non economists they picture things getting more expensive and their wages staying the same.

Right, they think they are getting poorer due to inflation, and this is one of the most toxic popular delusions in political economics.

It's not possible: Everybody's price paid is somebody else's income. So aggregate income must go up with any aggregate rise in prices paid. In a closed economy this is absolute, the rises must match perfectly. (In a small open economy not so, but in the US very close to so.)

Another way to look at it is inflation is a general rise in all prices -- and wages are the biggest price item there is, So it can't go up without them.

Max writes:

@Jim: only makes sense if the distribution of that income were a square and not logarithmic (1 percent being the big gainers). Also I don't see Labour force participation in all this. If this goes down then average wages rise but still more people might be worse off.

When it comes to inflation I think the public takes the statistician approach of a goods basket only that theirs differs greatly from the economists and so yes, they conclude that inflation destroys their savings while maybe also increasing current cost of living.

I think none of these concerns are adequately discusses in current discussions. They are handwaved away and that is why so many people distrust economists

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