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People's Understanding of Inflation

In: Inflation in the COVID Era and Beyond

Author

Listed:
  • Alberto Binetti
  • Francesco Nuzzi
  • Stefanie Stantcheva

Abstract

This paper studies people’s understanding of inflation–their perceived causes, consequences, trade-offs–and the policies supported to mitigate its effects. We design a new, detailed online survey based on the rich existing literature in economics with two experimental components— a conjoint experiment and an information experiment—to examine how well public views align with established economic theories. Our key findings show that the major perceived causes of inflation include government actions, such as increased foreign aid and war-related expenditures, alongside rises in production costs attributed to recent events like the COVID-19 pandemic, oil price fluctuations, and supply chain disruptions. Respondents anticipate many negative consequences of inflation but the most noted one is the increased complexity and difficulty in household decision-making. Partisan differences emerge distinctly, with Republicans more likely to attribute inflation to government policies and foresee broader negative outcomes, whereas Democrats anticipate greater inequality effects. Inflation is perceived as an unambiguously negative phenomenon without any potential positive economic correlates. Notably, there is a widespread belief that managing inflation can be achieved without significant trade-offs, such as reducing economic activity or increasing unemployment. These perceptions are hard to move experimentally. In terms of policy responses, there is resistance to monetary tightening, consistent with the perceived absence of trade-offs and the belief that it is unnecessary to reduce economic activity to fight inflation. The widespread misconception that inflation rises following increases in interest rates even leads to support for rate cuts to reduce inflation. There is a clear preference for policies that are perceived to have other benefits, such as reducing government debt in progressive ways or increasing corporate taxes, and for support for vulnerable households, despite potent
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Suggested Citation

  • Alberto Binetti & Francesco Nuzzi & Stefanie Stantcheva, 2024. "People's Understanding of Inflation," NBER Chapters, in: Inflation in the COVID Era and Beyond, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberch:15075
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    Cited by:

    1. Yotzov, Ivan & Bloom, Nicholas & Bunn, Philip & Mizen, Paul & Thwaites, Gregory, 2024. "The speed of firm response to inflation," Bank of England working papers 1085, Bank of England.
    2. Schnorpfeil, Philip & Weber, Michael & Hackethal, Andreas, 2024. "Inflation and trading," SAFE Working Paper Series 419, Leibniz Institute for Financial Research SAFE.
    3. Janet Hua Jiang & Rupal Kamdar & Kelin Lu & Daniela Puzzello, 2024. "How Do Households Respond to Expected Inflation? An Investigation of Transmission Mechanisms," CAEPR Working Papers 2024-004 Classification-D, Center for Applied Economics and Policy Research, Department of Economics, Indiana University Bloomington.
    4. Damjan Pfajfar & Fabian Winkler, 2024. "Households' Preferences Over Inflation and Monetary Policy Tradeoffs," Finance and Economics Discussion Series 2024-036, Board of Governors of the Federal Reserve System (U.S.).

    More about this item

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • E6 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook
    • E71 - Macroeconomics and Monetary Economics - - Macro-Based Behavioral Economics - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on the Macro Economy

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