The good trick that makes you believe that inflation is higher than it is


Has it ever happened to you, when you go shopping, that everything seems so expensive in comparison to one or two years ago? Stupid question, isn't it?

And yet … According to a recent study by MIT it could only be a problem of perception, which leads you to overestimate the rate of inflation and consequently the increase in the prices of the products you buy every day.

According to Albert Cavallo, professor of Information Technology and Management at MIT Sloan School, most people pay attention to these topics (inflation, deflation, GDP & Co.) only occasionally and this leads them to estimate the price evolution.

Better not to know. Cavallo and his team conducted the study in Argentina and the United States, two countries that have a decidedly different inflation rate, the former around 22.5% per annum and second at 1.8%.

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Many citizens are consciously disinterested in the issue and it seems that this is a good thing, at least in some ways, because it avoids excessive reactions that could worsen the situation and damage the economy. For example, by inducing anticipatory purchases and triggering hoarding phenomena.

Ok, the price is right. But there is also a problem of expectations: human beings have a very bad memory and tend to think that in the past everything was fine, or at least better, and therefore also that prices were much lower than the real ones. The perceived inflation rate is therefore much higher than the actual one.

This phenomenon also occurs in countries such as Argentina where the inflation rate of over 22% per year should prompt everyone to carefully plan their finances.

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However, research shows that, in countries where inflation is galloping, citizens are much more informed on the subject.

To each his own rate. Most of the interviewees in the field of MIT research also stressed that information on price trends is obtained and processed independently, not so much from information disseminated by official sources but based on daily purchases.

Economic self-defense. According to Cavallo these mechanisms are important, especially in countries with a high rate of inflation, because they allow to trigger defense systems against the erosion of the purchasing power of one's own currency.

With this study, published in the American Economic Journal, MIT researchers believe they can help governments understand the mechanisms put in place by citizens to make their choices, and consequently develop better policies.