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July 21, 2008

Perceived inflation

Most people think the inflation rate is much higher than the official rate reported by the government. Is this a case of mistaken identity on the part of consumers or are there valid reasons why people might overstate the speed at which prices are rising? Listen

Dr. Mike Walden, North Carolina Cooperative Extension economist in the College of Agriculture and Life Sciences at N.C. State University, responds:

"Well, fortunately most people aren't economists, so they don't look at inflation the same way economists look at it. The way economists look at inflation is we look at the rate of increase of prices of everything that we buy over the course of a year. And, for example, if we do that, we find that actually the inflation rate over the past year has been about 4 percent, admittedly much higher than a couple of years ago but no where near the record. Most people - again, who aren't economists - however, form their perceptions of inflation based on things that they frequently purchase, not everything but things they frequently purchase. So, for example today, if you look at gas - something most people buy every week - food - something most people buy every week - those items just happen to be the ones that are going way up in price. On the other hand, vehicles, which we don't buy every week, clothing, electronics - we may buy some of them over the course of the year (incidentally, those are all items where the prices are going down), we don't buy them every week. So the bottom line is, yes, I think there is a disconnect between the way economists look at inflation and the way the average person looks at inflation. Indeed, there have been studies that showed that when prices are rising, perceived inflation - that is, what people think the inflation rate actually is - can be five to six times higher than the actual inflation rate."

Posted by Dave at July 21, 2008 08:00 AM