People really dislike inflation. Today, with US annual inflation still above 8%, one in five Americans consider it the country’s biggest problem – spelling trouble for the Democrats at the November mid-terms.
Inflation is also the top concern for voters around the world, while in the UK, the public wanted the Government to deal with it before thinking about tax cuts (but the Government had other ideas).
From the Arab Spring to the recent Kazakh unrest, price rises often lead to mass discontent. There’s even a word for fear of prices – timophobia – and there’s plenty of it in Europe at present. Scarcely had this autumn started than 70,000 people gathered in Prague to protest energy hikes, blaming the EU and Nato. Anti-European populism has triumphed in the Italian election, with the far-right often using the energy crisis to attack the establishment.
Yet this discontent is at least in part the result of misconceptions. People tend to misperceive inflation as higher than it actually is, which stokes the potential for unrest. Economic research suggests this misperception is particularly common when the prices of everyday items are rising fastest, as they are today. So what explains this and what can we do about it?
How inflation works
During the Covid lockdowns of 2020-21, consumer spending fell drastically. Prices stagnated and in some countries even declined. But after the worst was over, consumer spending returned with a vengeance, creating supply shortages. Together with huge cash handouts in numerous countries to support people and businesses, and the effect of the Ukraine war on energy supplies, this is why inflation is resurgent for the first time in decades.