Inflation: Different social groups disagree on causes
In the USA and in Germany, prices have increased to their highest level in 30 years. A survey shows: economists, households, and managers see different reasons for this and do not share the same outlook.
Members of different social groups disagree about which factors are causing the current rise in inflation and how the trend will develop in the coming months. That is the key result of a representative survey by a research team led by economists Professor Dr Christopher Roth and Peter Andre, members of the Cluster of Excellence ECONtribute: Markets & Public Policy at the Universities of Bonn and Cologne. The team found that economists, managers, and households assess the situation differently, depending on which narrative they follow. The study has been published as an ‘ECONtribute Discussion Paper’.
The inflation rate in the United States was at 1.4 per cent in January 2021, but has risen to 6.8 percent in November – the highest since December 1990. Shortly after the figures were released, the research team surveyed US economists, households, and managers in mid-November about their inflation expectations. Among other things, the participants were asked to explain which factors they thought were causing the high inflation. A total of 1,029 representative households, 163 managers and 104 economists took part in the survey.
While the surveyed economists list several potential inflation drivers, managers and households tend to focus on individual explanations. Although the latter groups also list supply-side factors such as supply chain disruptions, labour shortages and the energy crisis, many see the responsibility as lying with politicians. Households, for example, blame the rising inflation rate on bad decisions by the US government, the pandemic, or companies wanting to increase their profits. Almost exclusively economists mention potential inflation drivers on the demand side, such as a loose monetary policy or increased government spending.
The groups also have different estimates of how inflation will develop in the coming months. While economists expect an inflation rate of 3.7 per cent in the next 12 months, managers expect 4.1 per cent, and households even 4.7 percent. Managers and households, unlike academics, assume that the inflation rate will still be more than 3 per cent in five years – well above the 2 per cent targeted by the US Federal Reserve.
Understanding the expectations of households and companies regarding inflation is important because economic models predict that these expectations in turn influence inflation. ‘If, for example, households ask for higher wages as a consequence, prices theoretically continue to rise and inflation takes on a life of its own,’ Christopher Roth explains. With their latest study, the researchers want to learn more about how inflation narratives and expectations correlate. ‘Our results show that the used narratives are associated with different inflation expectations,’ Roth adds. The team plans to explore this finding in further experiments.
ECONtribute is the only Cluster of Excellence in economics funded by the German Research Foundation (DFG). It is supported by the Universities of Bonn and Cologne. The Cluster conducts research on markets at the intersections of economy, policy, and society. Its aim is to apply a new approach to understanding markets and market failures in times of social, technological, and economic challenges, such as increasing inequality, global financial crises, and digitalization.
Professor Dr Christopher Roth
ECONtribute, University of Cologne
ECONtribute, University of Bonn
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Link to discussion paper: https://www.econtribute.de/RePEc/ajk/ajkdps/ECONtribute_127_2021.pdf