Almost a decade ago, the economists Francesco D’Acunto, Ulrike Malmendier and Michael Weber examined the responses given by 18,000 Americans to the Chicago Booth Expectations and Attitudes Survey. The study, by the University of Chicago’s Booth School of Business, tracked consumer attitudes to the economy and showed that, measured overall, on average women expected future price growth of 5.1 per cent while men projected inflation of “only” 4.6 per cent.
Women tended to base their expectations on grocery shopping; when asked what item they tracked most closely, their top choice was milk. By contrast, men watched gasoline prices, as they did far less grocery shopping on average. In families where men did an equal amount of grocery shopping, the inflation projections of the men and women were found to be more similar. “Traditional gender roles ... expose women to different signals about prices than men,” the group concluded, noting that this generated “divergent beliefs about future inflation”. And while a gap of less than 1 percentage point does not seem enormous, it is more striking when you learn that at the time of the study (2015) actual reported inflation in the US was less than 2 per cent.
We are, of course, all creatures of our own environments. But the above distinction seems worth noting again now, when central banks are scrambling to bring spiralling prices under control. After all, if consumers think that price growth will stay high, they may demand higher wages, creating a possible inflationary spiral; but if they are confident prices can be contained, it should be easier for central bankers to do their jobs. So it’s more important than ever to understand what is happening inside consumers’ heads as they project future prices.
It’s a tough task. In past decades, free-market economic theory tended to assume that economies were shaped by a “rational man” (sic) – the name given to an economic actor with a clear-headed, self-interested vision of the future. As behavioural economists have long pointed out, however, humans are never entirely rational, in the sense of being consistent and neutral in their views.
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The inflation gender gap is one example of this, but not the only one. Take the Michigan University consumer survey of inflation expectations, arguably the best known of its kind in America. This suggests that five-year inflation expectations have recently fallen from 3 per cent to 2.9 per cent. That looks encouraging, and economists such as Richard Clarida, former vice-chair of the Federal Reserve, have taken it as a sign that expectations remain “well anchored” (meaning “low”).
But, as investment analyst Jim Bianco has noted, an odd thing about this survey is that consumers did not seem to change their expectations last year, even as prices surged. That might be because the Fed is so credible (as Clarida argues); but it might also be because consumers are simply telling pollsters what they think they want to hear. “The survey is total crap,” Bianco tweeted.
Another possible explanation is that consumers’ focus on economic data fluctuates. Recently, a dozen economists in the US collaborated on a massive series of randomised controlled studies to explore the question of consumer “attention” to information. Although the “attention” factor is usually ignored, the research suggests it matters enormously. Their paper, Tell Me Something I Don’t Already Know: Learning in Low and High-Inflation Settings, argues that since inflation began rising again in advanced economies, “both households and firms have become more attentive and informed about inflation”. Ironically, this has actually seen them react less to fresh data than they do in quieter times.
A separate study by the St Louis Federal Reserve shows that, when investors are confronted by “abnormal GDP and inflation regimes”, they pay far more attention to speeches from central bankers, even between monetary policy meetings. Meanwhile, another recent project from a trio of economists from Israel (Yuriy Gorodnichenko, Rafi Melnick and Ari Kutai) argues that companies confronted with an inflation shock tend to raise their inflation expectations for the next year – even when other future data looks benign.
To put it another way, how consumers imagine the future is not just shaped by their own recent past, but also by how focused on the issue they are in the first place. All of which makes the central banks’ tasks doubly hard in the coming months. So with the Bank of England warning that grocery shopping prices are likely to stay above 10 per cent in the UK even as other inflation falls, all eyes should be on the price of milk. – Copyright The Financial Times Limited 2023
