Many economists forecast that the U.S. economy is poised to recover, albeit somewhat unevenly, from the historic disruptions caused by the pandemic. But the latest Consumer Price Index (CPI) report out this week has further stoked public worry that rising inflation could hobble that progress.
Bureau of Labor Statistics data showed prices up 5.4 percent last month over June 2020, a leap not seen since the Great Recession in 2008. It’s a figure higher than the U.S. Federal Reserve, which sets monetary policy, had expected, and the sixth straight month of rising prices.
Inflation is affected by a complex series of factors related to the supply and demand for goods and services. One of those is the perception people hold about how affordable things are today and how affordable they’ll be in the near future. With consumer spending making up about 70 percent of the nation’s economy, anything that discourages buyers can have an immediate and damaging effect.
Kenneth Rogoff, Thomas D. Cabot Professor of Public Policy and professor of economics, has written about financial crises throughout history. He explains how consumer psychology plays a key role in inflationary cycles and can influence how fiscal policymakers act.
GAZETTE: How much of a role does consumer psychology play in inflation trends? Can fears that prices will become out of reach help drive up inflation in some sectors?
ROGOFF: There are clearly some bottlenecks in the system. I think during COVID, producers were very reluctant to raise prices for fear of being called out for price gouging. They didn’t want to get in trouble with the government in an emergency situation. But as we emerge from COVID, there are clearly going to be some areas where the price just goes way up. You see it in rental cars already. And people will react to that. Typically, inflation expectations — which are, “Is my salary going to be good enough? How am I spending money?” — adjust really slowly. The fear that the Fed [Federal Reserve] has is once people get in an inflationary mindset, it also adjusts down really slowly. So in the social psychology sense, inflation adjustments are very slow. Right now, the way the job market is very strong in many, many areas, there’s a lot of upward pressure on wages. Some of that’s inflation. Consumer surveys and all evidence we have is — there may be some op-ed writers panicking about it and they may be right — but if you ask Joe Public, they’re not there yet.
GAZETTE: There’s an expectation that inflation will stabilize or come down once pent-up demand is exhausted, when supply-chain bottlenecks are cleared, or when prices exceed consumer tolerance. But does media coverage about rising prices and uncertainty over how long the prices will keep going up contribute to a negative mindset that also helps keep inflation higher?
ROGOFF: Yes, if it’s a shortage of something, like people held off on doing anything in their house or they’re buying a new car. And they may absolutely read about it and react more strongly. But it doesn’t seem to be generalized because they do have surveys of consumer price expectations, which have gone up. Price expectation is a way more cerebral concept than you’re worried about cars going up or some specific thing. That generalized notion of prices is something most people don’t really think about.