© 2024 KASU
Your Connection to Music, News, Arts and Views for Over 65 Years
Play Live Radio
Next Up:
0:00
0:00
0:00 0:00
Available On Air Stations

Inflation may be worse in our heads than in reality

SCOTT SIMON, HOST:

Seventy percent of the people polled by CNN this month say the rising cost of gas is a major problem. And gas is more expensive. AAA puts the average price of a gallon at $3.31 this weekend. That's more than a dollar more than at this point last year. But that price is still down from last month, and it's a national average. So if you're gassing up in, let's say, Missouri, Mississippi, Iowa or 19 other states this weekend, you'll probably be able to find cheaper gas.

Could it be that the fear of gas prices rising is as potent as any price at the pump? Stefan Nagel is a professor of finance at the Booth School at the University of Chicago and joins us now. Professor Nagel, thanks so much for being with us.

STEFAN NAGEL: Happy to be here.

SIMON: How do people's expectations affect the actual rate of inflation, do you think?

NAGEL: Think about workers' wage demands. If they expect that inflation is going to be high in the future, this is surely going to influence, to some extent, what they think about, you know, what sort of levels of wages are going to be appropriate, what sort of a raise they would want to get. If you think about this from the employer's side, they're probably going to be more tolerant of wage rises if they anticipate that they can raise prices in the future. You have similar effects going on when, for example, companies negotiate longer-term pricing contracts where the prices that they feel are appropriate are suddenly going to be influenced by what they expect the inflation rate to be.

SIMON: Your research has said that people's beliefs about future inflation is shaped by their own day-to-day personal experiences. Correct?

NAGEL: Mmm hmm. Correct.

SIMON: So if somebody has experienced inflation before in their life, they're more likely to be sensitive to the effects of inflation now.

NAGEL: That's right. But even aside from the current inflation rate, they just tend to have different views about future inflation depending on their experienced histories. So for example, if you - right now, if you ask people, what do you think the inflation rate is going to be, you're going to see a pretty big difference between younger people and older people.

SIMON: Yeah. Older people have lived through inflation, and younger people haven't had the pleasure yet.

NAGEL: That's right. Older people who have seen the 1970s, they, right now, expect high inflation going forward. But interestingly, if you look at the data from the early 1980s, you see exactly the opposite. It was younger people that had higher inflation expectations than older people. And, you know, how does this make sense? Well, it was younger people that had an experience that was completely dominated by the high inflation rates in the 1970s.

SIMON: And do political attitudes ever affect people's judgments on inflation?

NAGEL: They probably do. In the last few years, we have actually seen this for a lot of questions in economic surveys where people express views about the economy or their expectations about the economy. If you look at people's expectations about GDP growth in various economic surveys the time around the presidential election in 2016, within a matter of a few weeks, people's views about whether the economy is on a good track or not changed a lot, and they flipped depending on whether they were a Democrat or a Republican. People's partisanship seems to influence what they say about how well the economy is doing. And as a consequence, it's also likely that this affects what people say about their inflation expectations.

SIMON: Professor Nagel, how scientific is the term inflation at this point? - 'cause we're talking at a time when you have supply chain problems. You have a pandemic. Are we wrapping it around too much at this point?

NAGEL: In every inflation episode in history, you had, you know, different goods and services that were leading off the rise in inflation. In the 1970s, it started with oil. In the COVID pandemic now, it's, you know, different goods, the lumber and so on that started to rise first. While one can disagree about the details of how exactly you measure inflation, I think right now there is little doubt that we have seen relatively broad-based price increases over the last months.

SIMON: I feel this interview would be incomplete if I didn't ask you, how worried are you, professor?

NAGEL: I'm a little bit worried. But I guess at this point I still trust that the Federal Reserve is going to take appropriate actions going forward to make sure inflation doesn't get too far out of line.

SIMON: Stefan Nagel, professor at the Booth School of Business at the University of Chicago, thanks so much for being with us, sir.

NAGEL: Thank you.

(SOUNDBITE OF MUSIC) Transcript provided by NPR, Copyright NPR.

Scott Simon is one of America's most admired writers and broadcasters. He is the host of Weekend Edition Saturday and is one of the hosts of NPR's morning news podcast Up First. He has reported from all fifty states, five continents, and ten wars, from El Salvador to Sarajevo to Afghanistan and Iraq. His books have chronicled character and characters, in war and peace, sports and art, tragedy and comedy.