What causes inflation? Economists have a few ideas — namely, when demand vastly exceeds supply and prices rise. It turns out that the general public doesn’t always see eye to eye with economists about why inflation happens or how to fight it, according to the results of a recently released survey by the National Bureau of Economic Research.
Most people surveyed said that government spending causes inflation. This may be a factor, depending on the program.
But when asked what kind of government spending they worry 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 is no evidence that foreign aid has caused higher prices in the US, he said. But Gorodnichenko isn’t surprised by inconsistencies 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, according to Stefanie Stantcheva, an economist at Harvard who led the survey.
“The CPI, you know, the way we measure inflation is really very imperfect,” she said. “It does not capture the fact that different people consume different baskets of goods. And so people have a very valuable lived experience that sometimes doesn’t match our official statistics.”
Most respondents also said that rising interest rates will increase inflation. This – to be clear – is the exact opposite of economic orthodoxy, which says that if you make it more expensive to borrow money, consumer demand falls and – in theory – this should help lower prices. So why do so many people think that rising rates lead to higher prices?
“When we live in high inflation environments, we tend to see interest rates go up. And so causation might not be clear, right?” Stancheva said. “We see a correlation that is there, and it can be difficult to trace causation.”
One solution, argues Francesco D’Acunto, a finance professor at Georgetown who studies how people understand inflation: “Tweak policymakers’ communication in a way that actually makes it very clear what the policy objective is.”
In other words, better explanations from, say, the Federal Reserve about why it’s changing interest rates to keep inflation under control.
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