I wrote last week about the central role that inflation will play in defining the outcome of the forthcoming US election.
Since then, a number of people have pointed me towards a recent paper by Stefanie Stantcheva at Harvard who updates a classic 1997 work by the great Robert Shiller to ask: Why Do We Dislike Inflation?
It seems like an obvious question, but, particularly when asked now – at a time when inflation has such renewed political and economic salience – Stantcheva draws some powerful and perspective-altering insights.
Robert Shiller wrote his paper in the heart of the Great Moderation, when inflation remained under resolute control – there’s something almost nostalgic about the way he describes an era of rising prices. And this is important. Because he notes in his paper that, “At this time of relatively low inflation among most of the major countries of the world, “inflation” still appears to be the most commonly used economic term.” There seems to be a kind of folk memory of the pain felt by those who lived through the 1970s. Inflation is a bad thing, associated in the mind of the public and the media with an erosion in the standards of living, even if they don’t quite understand how it works.
Shiller’s conclusion is that “the main issue for the public with regard to inflation is just that people do not see the connection between inflation and increases in income that might be associated with it.” Almost 30 years on, and Stantcheva’s findings are remarkably similar.
Stantcheva interviewed more than 2000 people between December 2023 and January 2024, asking them many of the same questions that Shiller had asked in his survey. She left more questions open-ended, though, permitting a greater (and occasionally wilder) range of responses when it came to defining and judging the impact of inflation. Like Shiller, Stantcheva found that when it comes to inflation “individuals anticipate a variety of tangible adverse effects on both their personal financial situation and the economy at large.”
When asked about the causes of inflation, the majority of respondents took aim either at the government (this was particularly true for Republicans) or at corporations (more common among Democrats). “I think it has to do with Joe Biden ”, “Joe Biden’s policies for this round of inflation” are examples of the former, while the latter saw responses like: “I believe the sole reason is greedy corporations who care more about their bottom line than actually helping people”, “I think is some cases it is price gouging. When you know people depend on a product you want to see at what price are they still willing to pay for it.”
Stantcheva segregated responses into either broadly correct or broadly incorrect definitions of how inflation both came about and how it impacted individuals and the economy. Like Shiller, her main takeaway was that people largely understand the negative implications of inflation, while failing to grasp that it is quite possible for inflation to be a benign or even positive force for both the individual and the economy.
It feels to me that there are two key lessons to draw from these two papers when it comes to understanding the role of inflation within the political narrative of 2024. The first is that financial education is more important than ever. One of the bass notes running throughout the responses to Stantcheva’s survey is a generalized sense of disempowerment. Conspiracy theories flourish in the absence of knowledge. Both Stantcheva and Shiller highlight the negative role that the media play in perpetuating false conceptions of inflation.
The second observation is that inflation has become (perhaps has always been) a kind of terminological magnet for dissatisfaction with the economy. Baked within the responses to Stantcheva’s questions is a deep mistrust of both government and corporations, anger at levels of inequality, and a strong sense of a country in which many are struggling to make ends meet. The chart below shows the stark difference in responses to Stantcheva’s questionnaire according to income bracket.
Here’s a concluding idea: James Carville’s “It’s the economy, stupid” remains a deep political truth, but an equally powerful maxim came from an unnamed woman in the audience of a 2016 talk in Newcastle by King’s College, London professor Anand Menon. Menon was speaking just before the Brexit Referendum, and asked the audience to imagine the significant fall in GDP that would ensue should Britain choose to leave the EU. The unnamed woman stood up and shouted back: “That’s your bloody GDP. Not ours.”
It may be that respondents to these questions about inflation are voicing a similar kind of discontent: the fact is that numerous studies have shown that inflation hits low income households hardest. And just as the voter in Newcastle felt that she had no share in the success or failure of her country’s economy, it may be that the general experience of inflation, particularly among those towards the lower end of the economic spectrum, is that it is just another sphere in which the stakes are stacked against them.
