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Inflationary psychology could be pushing the prices of goods up faster

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Posted at 2:55 PM, Apr 22, 2022

With inflation at its highest point in decades, many families are working to save money any way they can.

Some are buying things earlier in the year, anticipating even higher price increases down the road in what is known as inflationary psychology.

"It shifts inflation that would've happened in the future into present,” said Daniil Manaenkov, the head of national economic forecasting at the University of Michigan.

Inflationary psychology is a self-fulfilling prophecy of sorts, and it makes complete sense, logically. It plays on our overall worry that if we do not buy a purchase we had planned months in advance, say a new car, right now, we will pay more later and thus our fears drive us to physically cause inflation to spike faster. Manaenkov says it happens with large purchases such as a home, car, or non-perishable items.

"Food is expected to rise in price in the next several months, but if you were to look at agricultural commodities- so wheat, corn, soybeans- their prices are up significantly because they're storable and people are expecting them to increase in price,” said Manaenkov.

Much like inflation itself, inflationary psychology is a phenomenon that we consumers drive, but we are also the ones who determine if those prices stick around.

If wages increase, and workers have the bargaining power to demand it right now. People have more money and it is more likely they can afford the higher prices.

But according to the Brookings Institution, wage growth is not keeping up with inflation (8.8% nominal wage growth vs. 11.1% inflation since the start of 2020), so there is no clear answer on how long inflated prices might stick around.

“Economics is hard and psychology, studying human behavior, is even harder,” said Manaenkov.