Over the coming few weeks, alongside the regular coverage of the Clark Center’s polls and other news, On Global Markets will be reporting on the discussions held at the Economic Experts Conference 9/10 October. Most of those sessions were held under the Chatham House Rule.
The public, as election results around the globe over the course of 2023 and 2024 implied, seems to really hate inflation. And yet, as participants at the Clark Center Economic Experts Conference discussed, they are still uncertain on how best to think about the costs of price rises.
While Milton Friedman famously argued that inflation is a tax on money, the range of US inflation over the last few decades has – mostly – been too low for such a mechanism to cause serious economic problems. In recent years, the kind of economic models favoured by central bankers – and maintained in the words of one participant by ‘people working in the dungeons of regional Fed banks’ – have tended to try and incorporate the way prices change can happen in a slow and often jagged manner, distorting microeconomic price signals and causing inefficiencies at the macroeconomic level.
But while such a mechanism for inflation-causing macroeconomic problems may make sense theoretically, it is unlikely to explain the public’s loathing of rapid price changes. Equally, economists have long recognised that the interaction of unexpected inflation and contracts set in nominal terms can cause redistribution to occur. Between, say, debtors and creditors or between wage earners and those paying them. Of course, in cases of redistribution, a cohort of winners will be created alongside the users. It may be the case that the big relative ‘winner’ from the high inflation of 2022-23 was the government, which saw the real value of a large nominal debt fall. And, if that was the case, then the unpopularity of inflation amongst the private sector would make some sense.
Another potential explanation for inflation’s deep unpopularity could be found in behavioural economics and the concept of money illusion. People could, for example, notice changes in nominal prices more keenly than they sense increases in their own nominal wages, and so, even if real wages are holding steady, people may perceive that they are losing out. More speculatively, it could be the case that people disassociate rises in their own wages with rises in prices. Wage rises might be mentally banked as something that has happened due to a person’s own efforts, while price rises are the fault of somebody else.
Given this is a deeply empirical question concerning how the general public perceives the costs of inflation, opinion polling offers another source of evidence.
The polling evidence suggests that higher income households tend to have both perceived past inflation as lower and to expect future inflation to be lower than less well-off households. What is more, female, black, and Republican individuals – in polling carried out in 2024 – all tend to think inflation has been higher in the past and expect it to be higher in the future. Of course, given the partisan skew on much economic polling, Republican (and Democrat) attitudes may well have switched following the election of President Trump.
A word cloud featuring responses to open-ended polling questions about the impact of inflation made for a grim slide. The largest – and so most used by respondents words 0 were worry, anxiety, and anger.
A plurality of households, across all parts of the income spectrum, blamed ‘government’ for inflation, although with the usual partisan split. The polling evidence on theories of inflation and wages was equally interesting. 51% of the whole sample believed that ‘inflation will increase my employer’s profits, but she will not feel the need to increase my pay’. Among respondents with an income under $40,000, that rose to 54% and among those with an income over $125,000, that fell to 48%. That is perhaps a less stark division along income lines than one might have expected.
The public clearly strongly dislikes inflation, which is associated with financial hardship, anger, and anxiety. A majority believe that it will boost their employers’ profits, and their own wages will not keep up. A large number of people seem to hold the government responsible. But what, if any, are the policy implications of that?
As one conference participant noted, it seems reasonable to think that in the short run at least, there is some sort of trade-off between inflation and output growth. Rarely discussed in the popular debate about the public inflation backlash is the counterfactual. If the Fed had aggressively responded to US inflation in 2022 and 2023 and held price rises at, say, 4% rather than 8%, what would that imply for GDP growth? Would a deep recession have been any more popular than a painful rise in prices?
Perhaps, as one panellist put it, economists should be thinking about inflation in a similar manner to how they think about taxation. The evidence suggests that the public hates taxation in a similar way to how they detest price rises, but no one seriously suggests that the policy lesson is to entirely eliminate taxation.
