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The Psychology of Inflation

by Paul Ebeling


Inflation expectations are picking up as bond yields rose Tuesday and the reopening trade kicks back into high gear”–Paul Ebeling

Inflationary psychology is a state of mind that leads consumers to spend more quickly than they otherwise would in the belief that prices are rising. Most consumers will spend their money on a product immediately if they think its price is going to increase shortly.

Price inflation is typically measured sequentially (M-M) and annually (Y-Y), with the latter introducing what are known as base effects. Base effects refer to the impact of comparing current price levels in a given month against price levels in the same month a year ago.

In March, April and May inflation was compared to the disinflationary levels in the corresponding frame of Y 2020. 

Those base effects are in the scrapbook, as companies fix their supply chain disruptions. But, it depends on the category of goods and services measured, as some imbalances remain. It is is a function of what service or commodity product we are talking about.

Price inflation is not sustainable if people cannot afford the prices and companies do not have pricing power. But that changes as workers’ wages increase, and it’s a so-called wage-price spiral that can really drive prices North.

LTN economist Bruce WD Barren explains that it is important to look for signs when purchasers and workers psychology is changing.

He explains, that when you go through real serious periods of inflation. “like in the 1970s, it had a lot to do with psychology, the psychology of workers willing to ask for higher wages, and companies’ willingness to pass on higher costs along with increase wages. Plus, there is a psychological aspect to that which is harder to quantify, but something that we have to keep in mind as we think about the longer term implications of what we are seeing right now.

If you recall, inflation in the 1970s was caused mostly by the rapid increase in oil prices but thanks to the prior Administration, we have become an energy self-sufficient exporting nation.

Today, our inflation is the result of the ‘wide, pork barrel Washington’ spending with little regard for Congressional fiscal prudent budgetary management. This has been the result of a serious erosion of the US Dollar and the pent-up demand caused by the Covid-19 Pandemic. Unfortunately, wages had not risen accordingly, which has put serious pressure of our lower income families and their ability to especially buy necessary groceries, gasoline at the pump plus actually own a home.”

Have a prosperous day, Keep the Faith!

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