Inferiority Complex

15 11 2012

America

iStockAnalyst:

But what, exactly, does this concern about “inflation” actually reflect? Probably not what we think. Some time ago, my colleagues Mike Bryan and Guhan Venkatu (from the Cleveland Fed) made note of “The Curiously Different Inflation Perspectives of Men and Women.” Their findings are pretty informative:

Over the past few years, the Federal Reserve Bank of Cleveland, with assistance from the Ohio State University, has studied household inflation perceptions and expectations using a monthly survey of approximately 500 Ohioans (the FRBC/OSU Inflation Psychology Survey). This survey, which records respondents’ perceptions of price changes over the past 12 months as well as their expectations for price changes over the next 12 months, has uncovered a surprising result. 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.

I don’t think this is a psychological issue, it’s a reality issue, and a clue to the way that the official inflation statistic methodology is rotten.

We’ve had this discussion here in the recent past about the economic (not moral) difference between a regular good an an inferior good.  In case you were asleep, or my explanation put you asleep, stay awake and grok this:  A regular good is a good or service whose demand increases as people’s income increases, and an inferior good is a good whose demand increases as people’s income decreases.  Example:  The fanciest green bean cuts from the luxury mini-supermarket in uptown are a regular good, Aldi’s cans of green beans are an inferior good.  Again, in pure economic terms, not necessarily quality.  (Though the real world correlation is usually strong.)

One thing that has kept the official inflation stat relatively low is because the Federal beancounters are swapping out the cans of luxury green beans with cans of Aldi’s green beans to keep the total cost of the market basket from going up too quickly.  Of course that’s bullshit, because you’re not literally comparing apples to apples and oranges to oranges.

The reason that lower income people, single people and non-whites are “perceiving and anticipating” more inflation than higher income people, married people and whites is not because they’re delusional or victims of head tricks, it’s because the REAL inflation that exists for everyone, which they see with their eyes, puts more strain on their budgets more acutely.  Federal government’s beancounter has every incentive in the world to swap out Whole Paycheck’s green beans for Aldi’s green beans to keep the “official” CPI inflation rate low to keep interest rates low so that the Federal government can still borrow money at low interest rates (LIBOR-style manipulations notwithstanding) and keep Social Security COLAs as low as possible, so that the Federal government can keep on hiring and paying its inflation statistic beancounters.  Too, elected politicians don’t like high inflation rates.  However, low income person who has lived on a fixed income for a long time has never had that luxury:  He or she has only ever been able to purchase Aldi’s green beans.  So he or she sees an apples to apples inflation metric with his or her own eyes every week or every month.  Since such people can only ever buy inferior goods, they can’t swap those out for sub-inferior goods to avoid inflation.  And to such a person, when Aldi charges, for example, 10 cents more for a can of green beans this year than last, and in turn 10 cents more last than the year before, that’s a BFD for their zero-sum game budget.

Sure, the cans of luxury green beans are also going up, but higher income people miss the marginal inflationary costs on those goods far less than lower income people, and while there is an accurate inflation statistic in front of their face, comparing luxury goods to luxury goods, they really don’t need to pay that much attention.

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One response

15 11 2012
Puggg

From what little I know about it, one other big problem with inflation statistics is that it relies on some really weird stuff going inside the “market basket.”




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