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Referring to “The Son of Man,” Belgian surrealist artist René Magritte said, “Everything we see hides another thing:”
We could say the same thing about inflation.
Consumer Price Changes
Less than last year, the price of Thanksgiving dinner for 10 was $61.17. But still people complained that everything cost more.
After a June 2022 peak, the inflation rate went down. As a result, prices went up less. With 2% the goal, we still will pay more. But paying an average of 2% more annually is okay. In fact, before 2020, when prices were rising by 2% a year, we never complained.
So, why now?
The pop in the inflation rate has the answer. We need approximately $20 more for a basket of goods and services that cost us $100 in 2019:
So, although prices are rising at a much slower rate, they remain at an elevated level. Their trajectory is called disinflation. If they went down, it would be deflation–a phenomenon that we want to avoid.
Looking back to 2019, we remember that we paid $2.29 at the gas pump while now it is closer to $3.28 a gallon. A dozen eggs went up from $1.55 to $2.07. And bacon, increasing from $5.61 to $7.30 per pound, really got to us:
Our Bottom Line: Reference Points
Looking at sentiment about how prices have gone up, a behavioral economist might take us to a reference point. Reference points influence our opinion of what we are paid, what we achieve, and what we pay. At work we will be unhappy with a 5% raise when an associate gets 7%. If our stock portfolio plunges, we don’t feel so bad if the S&P declined even more.
Similarly, we should be happy that the inflation rate is heading towards 2%, unemployment is at historic lows, and the GDP is growing. But instead, judging prices with a 2019 reference point, we criticize the economy.
Returning to where we began, the higher prices that we see “hide” the disinflation that should please us.
My sources and more: Thanks to Bloomberg Radio for inspiring today’s thoughts. From there, It was helpful to see the analysis and then look directly at the data, here and here. But if you want the behavioral side of reference points and framing and anchors, do go to economics Nobel Laureate Daniel Kahneman’s superb book, Thinking Fast and Slow.
