Why Everyone's Experience Of Inflation Is So Different

And we're sort of watching the reactions come in in real time, um from the cell side, analysts and on social media, and it's amazing how you're getting these sort of two distinct camps. So on the one hand, everyone is looking at the same data, but everyone seems to be reaching vastly different conclusions. So on the one hand, you have people who say this is still transitory. A lot of the strength is in uh, certain segments that have seen these supply bottlenecks that we've been talking about.

And on the other hand, you have people who are saying, well, this is starting to look very worrying and maybe something more permanent. Right, there's no question that the intensity of the CPI gains that we've seen really over the last three months have been higher, hotter than economists had expected. It seems to be lasting a little bit longer. So on the one hand, you can say, Okay, that's worrisome.

On the other hand, when you dig into the guts of the report, it still looks like there's an argument for transitory. So a huge component of this is still used cars, which haven't slowed down. You know, not long ago, we were never talking about used cars is an important inflation category. Now is something like a third of the game or of the game was used cars. Other categories

specifically related to reopening are pushing things higher. So I kind of think it's like an impasse, like no side will be totally satisfied, because the people who are convinced that there's all transitory could point to the sub indexes of the sub numbers whereas the people who are saying this is a start of a real problem point to the headlines that are hotter than expected several months in

a row. Now, Yeah, it's kind of like CPI is the ultimate exercise in confirmation bias, Like there's something for everyone, Um, whether you're looking at the headline numbers or the sub components. But I mean, I say that, And one of the things I've been thinking about a lot lately is this idea that you know, the saying that inflation is always an everywhere a monetary phenomenon, which I don't necessarily disagree with,

but I feel like it's also a human phenomenon. And you're seeing that in this discrepancy between these two camps of people looking at the inflation numbers, and you're also starting to see it in terms of inflation expectations themselves. So for instance, if you look at the breakdown of survey respondents by age, you can see that older people are a lot more worried about inflation at the moment

than younger people, which is kind of interesting. Yeah, I mean, I think instead of, you know, they say it's always a monetary phenomenon, but look, I don't think there's an obvious monetary link to be drawn between say, anything that the FED has done recently and the fact that use car prices continue to have this bottleneck and part due to a chip shortage as a result from our over

alliance on t SMC and the virus and so forth. So, but what I do think and what I think you're getting it too, is that there is a tremendous political valence to all inflation. And if you are young and you're able to be flexible in your consumption and lifestyle patterns, maybe inflation doesn't infect you affect you so much. If you're older, if you're on a fixed income, it could

be a greater problem. If you're a urban professional who likes to eat uh, to put laburrito balls and take an uber to work, You're probably not thrilled with the cost of an uber these days, and you want the FED to hike. So a lot of it is sort of like personal it's formed by one consumption pattern. There's a political nature, and I think these headline CPI numbers that we get no one feels them like no one,

Everyone's like, that's not my experience that things are. Everyone is sort of a subjective experience of what kind of inflation is happening in the economy. Yeah, exactly, Subjective is the key words. So I'm glad to say that we are going to be getting into the subjectivity of inflation on this episode, and we have the perfect person to

discuss it. We have someone who basically wrote a seminal paper on inflation experiences back in and she's been updating her thesis with new research, and we're going to get into that. I'd like to welcome Ulrika Malmind onto the show. She's a professor of economics and finance over at the University of Cali Conia. Welcome, Thank you so much. I'm excited to be here. We're excited to have you so UM we just had the CPI numbers come in. UM,

I guess, I guess. My first question is when you started looking at inflation, or at least when you published this paper called Learning from Inflation Experiences back in you sort of looked at this issue from a very different angle, from a human experience angle, And I'm just curious what

sparked your interest in pursuing that line of investigation. UM. Yeah, that's actually a really good question, in particular given that my earlier research was actually not on inflation, but on stock market experiences, the Great Depression and how it, you know, generated this generation of depression babies shying away from the stock market. But truth be told, it was actually inflation

that first room me into that. UM. As you may have detected by now, I'm German, and my coutha on that first paper, Stefanaga is also German, and I remember us talking in the hallways of the university about why the Germans, including us, have always been so obsessed with inflation and had inflation concerns, etcetera, and us tracing it back to that traumatic experience experience of many Germans of

the German hyper inflation. Um So it was indeed long lasting effects of living through an inflation and how it affects your beliefs and world views that drew me into that. I very much hope we won't have to draw parallels

from the current inflation spike. That's that's interesting. I mean, obviously I've heard that my whole career, that you know, you look at German uh fiscal policies, you look at the official German stand towards the ECB typically and I'd always cited exactly what you say, that there is the history, the shared memory of the hyperinflation, which we've talked about on the past episode, and that continues to inform German

perspectives on macro policy till this day. And I've always wondered, like, is that a myth or is that it just so story or is it is that an oversimplification of things? How much can you expand on that a little bit further? What is the manner view which this traumatic episode of the past continues to inform public sentiment and public policy today?

How what's the transmission mechanism there? Um? That is an excellent question as well, And to be really honest, it is a little bit outside of the data I've actually studied, because I have indeed studied the inflation you have personally experienced, And how say, talking about today's events, and you know, pointing out that some older generations might be more concernt than some younger ones, attributing it maybe to different lifestyles, and I would you know, want to make you pause

and say no, But it also might reflect what if personally lived through those younger folks might not have a vivid memory of the nineteen eighties. So you're quite right to question me about the you know, German hiphire inflation almost hundred years ago, and and Germany has had quite stable price increases, price levels throughout the last you know, decades,

So how is that possible? Well, increasingly I am getting deeper into the underlying, underlying neuroscience of what kind of events do get deeply engraved in our memory and transmission from generation to generation can happen? Stories, vivid stories matter. You know what also matters media? How much podcast news, organization, social media, etcetera. Are highlighting the inflation will have a big impact on how much this will be engraved in

our memory. But here we're just at the beginnings. We're getting to the deep underpinning from your science and ubsformation and so on as we speak. I hope I have more to say on that soon. So why don't we get into some of your research and talk about what you just pointed out? This idea that there's a difference

between people's experiences versus their personal inflation baskets. So it might be that older people who are on a fixed income UM and whose major expenditure or whose major source of revenue comes from you know, bond payments or something like that, UM, they don't like inflation, they fear it. But it might also be that they're the ones that remember periods of inflation like the nineties seventies versus younger people. So I guess I'm curious, like, could you describe that

UM effect in detail? And also can you describe how you disaggregated those two things in your study? Yeah, happy to do that. So let me start by saying both are at work. Both mechanisms you just pointed out, UM differences between your personal inflation, your personal consumption basket and the associated inflation UM compared to mine places significant role. And then difference differences and experiences we have made over

our lives so far. So starting from the ladder which some of my research you referred to earlier builds on, I literally looked at when people was using US data, but we have since then done also non US studies. But so I literally looked in the Michigan survey of consumers when people are born, what has been the inflation over their lifetime so far, and then asked, um, does

that predict their inflation expectations looking into the future. And it turns out yes, that personal inflation experiences are really powerful. Your lifetime average inflation so to speak, is really powerful in predicting what you think future inflation will be. And this is just taking aggregate inflation experiences. So we are not yet at those personal consumption baskets. Now. Just to complete the picture here, economists would immediately say, well, you

know these my the information as symmetries. I'm not reading, you know, the back page of the Economist, or not following as much as you guys the new CPI numbers coming out, and so this just reflects that I'm not

aware of it. Well, what I then like to do is to point people to our study of f o MC members, right the Federal Reserve bankers, of all the data at their fingertips and even for them personal experiences, just taking their birth here, calculating their lifetime average inflation experience in the aggregate is really powerful in predicting their semi annual forecasts of inflation to Congress. So that's at work. And then the second point is definitely also at work.

If I am able to get exactly um, your consumption basket, or let's take a big chunk of it, let's take your grocery shopping and look at inflation that occurs in there, it has significant influence on your predictions about future inflation. So cool fact here is um that for years we've known that women tend to be more pessimistic, so they have higher inflation expectations. FED Federal Reserve bankers have known that For years, I've always wondered why the women are

so anxious about inflation. Well, it turns out that if you control for grocery shopping so traditional you know, gender roles women, that's the grocery shopping, it takes the whole gender effect away. So it just comes from groceries being so volatile, people anchoring on the price hikes. That explains all those gender differences. So this is I think a powerful example for your second point. What about gasoline. There's I hear people often say that people form their views

on inflation at the pump. Yes, indeed, so we also see that in our data. Other people I've found that in their data. You know, my my dreams scenario is still one where I get subjects to put on you know, Google glass or something like this. I can literally see all the prices they look at all day long, and I think, um, we would get a really really good picture of what their inflation beliefs are currently. So we have been focusing on grocery prices because there's fantastic detailed

data on it. We have some data on gasoline. If

you combine the two, it comes even more powerful. So one of the things I've always wondered is this might sound like a weird question, but bear with me, but the degree to which inflation expectations actually matter and whether or not people do or do not change their behavior based on their future expectations of inflation and um, for people like I guess Joe and myself, certainly for our professional lives, we've experienced pretty low rates of inflation, and

so it's hard to conceptualize a moment in time where if inflation were to spike, what would our consumer respects actually be to that, Like, I have no basis for comparison, so it's really hard to imagine. Um, I'm just wondering what's your take on that. Do inflation expectations actually impact behavior? Yeah? Um, this is a question I get not only from you know, folks working in the media or even outside in academia and media, but even within academia, we are often asking

ourselves that question. I often get that in referee responses to my papers, and it's a it's a very reasonable question. Of course, traditional economic models would say, oh, yes, it will affect your savings decision, including your retirement saving. It might affect your consumption choices. Right, Inflation goes up, we should all be spending like crazy because money will be worth less in the future. And that's not quite what happened.

So I just want to pause for a moment and say that the standard economic models in academia but also in the policy world do implicitly assume there's a strong link, and so that goes into all of policy recommendations. Um so um. The baseline assumption is there, But is it

actually true? Well, if we look at decisions of people who literally deal with inflation, so as I said, I'm studying m f O m C members, members of the Federal Market Committee, who you know, decide about interest rates and react to to the inflation they see and unemployment rate, etcetera.

I do see it working there. So for startus. Among the professionals, the effect is there that they're overly influenced by their personal experiences and are voting to dissent, say from the chairperson's proposal if um, you know, their personal experiences point them in a different into a different direction. Fun fact. Also, I got some data from UM one of the big financial firms working in bonds, and they

are too. I got also their nationality inflation, the French and the Germans and the many Americans working there they've personally experienced in fact their beliefs and will absolute really influenced therefore decision their decision making in the firm. But I think you're ultimately your question was more targeted maybe too, you know, the person like you and me who's not necessarily like actively trading or making policy decisions based on

inflation numbers. And it is a good question. It is to a large extent, and open questions still to be shown how it affects savage negotiation, labor market choices, etcetera. But what I can say is that, well, not surprisingly, personal inflation experiences affect your beliefs about future interest rates. So you know, inflation and nominal interest rates are closely linked,

so it shouldn't come as a big shock. But only recently we've been able actually to get the data to formally show inflation experiences strongly affect in not only inflation beliefs, but correlated with that also nominal interest rate beliefs, and then those in turn effect some of the biggest financial decisions households make, namely whether to buy or rent a home, and conditional on buying, whether you take a fixed rate

or ARBA rate. So the generations who have had experienced, for example, the big hikes end of the nineteen seventies n eighty, who were really afraid of that happening again, they love fixed rate mortgages. I think the shadows of that are still present, and they are forgoing lots of money by not using cheaper variable rate mortgages when available.

So here I would say we do have some first evidence. Yeah, I feel like even the children of that generation has been like sort of like taught that fixed rate mantra. So it's like, even for myself and I own a house, just like the idea of like, you know, all I've experienced all my life basically is lower and lower rate. But still the idea of like thirty year fixed rate being the most responsible thing to do feels very Uh

that that feels like a very powerful force exerted on me. Okay, you find these cohort effects where there's sort of these clear links between the experience that someone had, whether it's an interest rates, whether it's on inflation, and their personal behaviors.

To what degree should policymakers internalize them? Because we know, like from the FED perspective, they put a lot of weight on inflation expectations, and they often ascribe mythical powers, it seems like, to the public's inflation expectations and the

importance of keeping them so well anchored. But if inflation expectations are so subjective and so heterogeneous across different parts of the population by age, demographic experience, and so forth, how much power do they really have as an economic force. I think that goes back to the previous question. To

some extent um. I think the FED should continue to spend a lot of time on figuring out how these inflation expectations actually translate into economic decision making, and how our standard economic models are actually wrong and many respect So I'm totally with you and and questioning that. However, I would not say that, oh, because they're so heterogeneous, we should throw up, you know, throw our hands at the air and say, well, what can we do here? There?

This mythical representative agent whom we are targeting doesn't exist. You use the word courts before, and I think that's a good clue. Certain chords have experienced, say the nineteen seventies and nine eighty hikes peak inflation, that's haven't And that comes with different ages. So it's the younger generation, as you're saying in the intern today, which is less concerned about this inflation, and that's the generation that will likely be borrowing and um going for the new houses.

So the older generation is instead the one that's providing um, this liquidity in the market. So where do we see the shortage right now? What do we want to encourage who's looking for jobs? Um? You know, rather than saying oh, we actually target this median investor or a media and consumer, or saying oh, we can't do anything because it's so heterogeneous, thinking by courts, thinking by where the needs are, the

unemployment concerns, etcetera. I think it's the way forward. I mean, again a related question, but do you think that policymakers actually look at demographics when they're looking at inflation expectations? Like, to what degree do you think they're trying to break down an inflation survey by subjective experience? Well, I don't

work in the policy world. Although I enjoy the interactions I have, I don't want to give the completely oversimplified impression that nobody is looking at breakdowns by by age. I mean you you guys started today's podcast UM that way, and I know UM people are highly aware of that as well, in terms of UM accounting for where these people come from, what their experience has been, and therefore what their fears are likely going to be. I personally

think they're still too little. So there's some aspect of looking by age, as you are pointing out, but then we tend to attribute everything to age specific life cycle specific effects. Oh, the older generation investing more in bonds, consuming out of bond in calm, etcetera. No, but it matters whether that older generation lift through the peak or not. Is kind of way I would like to push things towards.

Why is inflation so political? I mean, there's there's many ways to measure the economy, and there's numerous data points to sort of get fields for the forces and pressure is exerted on the economy at the time. Inflation is one. Obviously employment is another. All that we get, we get fresh data points every day. There's something about inflation that captures people's imagination. It makes people angry. People form full

identities out of their stance on inflation. In your work, do you have any insight into what it is about this particular number that sets people off. This is so interesting because as a German, I would think, oh, it's so much less political in this country compared to where I'm from, right, so I mean in in Germany, definitely, the tabloid would have as headlined discussion about inflation policies of the European Central Bank and why they disagree with those.

Um So, so that's a really interesting perspective already. But um nevertheless, I think you are right. It might be it's a pretty technical measure, and it is, it does play a fairly large role. Nevertheless, I don't have research on that. My personal suspicion from you know, having worked a lot with the data, having read a lot, is it has this aspect of making assets you certain assets

you own potentially less valuable while others not. It it generates some kind of inequality and how much people are affected by the outcomes of a crisis. So people holding real estate, gold stock less of acted than others, and I think that sometimes trigger us an additional degree of these tensions. But yeah, I'd be curious to find out what others think. I wanted to talk about some of your recent work as well, and you've been applying a lot of the things you've learned in this paper to

policymakers themselves. And I think this is absolutely fascinating because in your latest work, I think you found that f o MC members personal experience with inflation affects their expectations for inflation so much so that you can actually kind of predict where they're going to go better than some more traditional UM forecast methods. So could you maybe walk us through that and also how you got the idea

to look at this particular topic. Well, to be completely honest, what had been irking me UM is that economist, and I think to some extent also people working in the policy world, had been very fast to attribute any kind of experience effect. To use the term we've coined two

informational asymmetries. So just as I as I stated earlier, UM, if somebody who has lived through the German hyper inflation or the higher inflation in the seventies nineteen eighty in the in the US, if that person tends to be more pessimistic about a future inflation numbers being rather high, then UM in condoms are quick to jump to the conclusion that they're informational frictions. Not everybody has all the information data at their fingertips. Hence UM those personal experiences

as just data we are aware of. And that explains why personal experience affect your beliefs. To draw a finer distinction between your personal experiences affecting you so strongly because they're differently anchored in your brain versus, oh, without experience, you just don't have the knowledge, you're not aware of it.

I was really drawn to the idea to basically hone in on the experts on the people as far as I imagine you know the FMC members lives they have, and on their desk in front of them all the inflation numbers anybody would ever want to see. There's no informational asymmetry whatsoever, and UM now they're ready to run and make forecasts about future inflation. And so to show, even for those UM experts that they are strongly affected by their personal experiences is what really drew me into

that topic. But what were the actual findings? Because I found the link that you found between members personal inflation history and sort of predicting or forecasting how they might react to monetary conditions, that was really striking. So the first step is simply to relate personal experiences to their forecasts. So, as you probably know, the FMC members twice a year make these um forecasts to Congress about what they think inflation will be. You know, various horizons, I say one

year had horizon under you know their ideal policy. And if you plot what members say in these in in these semi anormal forecasts against their personal experience UM normalized you know, you want to account some word forwards year, we're in, etcetera. So we normalized by what their staff told them in the green box. So normalized by the stuff forecast, you get the most beautiful scatter plot of like strongly correlated personal experience and what they say. So

so that was interesting. Now you go to the actual voting behavior. And I was a little nervous of doing this analysis. I mean, one thing is to look at a hundred thousands millions of US consumers and their inflation expectations and how they maybe choose their fixed versus variable rate mortgage, where I have a lot of variation in ancient experience versus you know, even at this day and age, pretty much somewhat older male white members of the for m C. But luckily there was some hit origin Eatey.

And what we found is that if you look at even relatively small about one standard deviation increase in personal experience point one, sorry percentage points increase in personal inflation experience relative to the overall group, that does have significant predictive power for your voting behavior. So for your actual you know, dissent to the chairperson's proposal in terms of what should happen and to interest rate. And as you know in this day and age, descents have become less common,

less less frequent. There was a bit of a of a break. But so if you look, for example, at the overall frequency in the data of a DABBSH descent, it's about you know, two point five or something probability. But if I increase your personal and inflation experience by about one percentage point, that probability goes down by about a quarter. And the exact reverse is true for HAWKERSH descent. So that probably somewhat higher about four percent of your

FMC members are willing to descend. But if I shock you, I mean I make you a person that's born at a time with somewhat higher inflation experience point one percentage point, your quarter or third higher probability of dissenting with the forecast. So it has actual impact. Um, you might not turn around the ultimate vote, but it does leave a you know, it is a statement that's seen by the market. It might influence the next proposal the chairperson would be making.

I do have if you're interested in it's a very cool anecdote to add about a German guy. Okay, so there's this guy born as Heinrich valik In in Berlin, in Germany, nineteen fourteen into a family of bankers, and he actually lived through Germany's hyper inflation in nineteen twenties three. The family emigrated into the s in the nineteen thirties, where he became economist and was a FED governor from

the mid nineteen seventies to mid nineteen eighties. And by then you know Henry Wallick rather than Heinrich Vallei, but was a you know, very well regarded member of the Fed, and to the best of my knowledge, she still holds the record of descents. He descented twenty seven times during his tenure on the Federal Reserve Board, which is the

highest number of descent among all FMC members. And as you can imagine, he was very much into the hawkers direction, always telling everybody that they don't understand how this can happen and the implications, etcetera. And clearly this is a super smart person that he knows he's in a different country, in a different monetary system, he's in a vastly different decade right now, and still he couldn't shake it, and

that experience just stayed with him. I guess I have a sort of like very big picture question as someone who looks at the intricacies of inflation and how they relate to individual groups of people, what's your take on on the current environment. And I realized you're not a market watcher, but we we did just have cp I come in much hotter than expected. You mentioned the idea that the more the media talks about inflation, the more people see articles or other people discussing it, the more

it sort of feeds into inflation expectations themselves. Would you expect um this to become a sort of self fulfilling cycle. That is a very good question. Currently, I I happen to still be in the camp, which is, you know, watching how different unusual components of the inflation basket. And Joe mentioned the used car market, for example, having an overproportional influence UM given all their supply and demand disruptions due to COVID nineteen, which is kind of trying to

get into kind of a smoother flow. Again, I'm personally thinking there are lots of frictions which are having influences right now. So I'm currently still thinking that things will you know, have to be looked at again in a couple of months. But obviously in particular with all these um uh support government support, there is a real concern.

Going back to the theme we had in the beginning, I do think that if this remains the main news story over the next month, it might end up accelerating in terms of the impact on people's anchoring in memory and the vividness and how much they are taking into a count. If instead other things positive or negative, if you know, talk about the data variant, etcetera, UM starting to dominate the news cycle, I would expect this to have a less long lasting effect on people's inflation fears

and economic decision making. I think that's probably where I currently stand. All Right, Well, we got a fascinating conversation, and I really do urge anyone listening to check out some of your research on the topic as we enter this very very heated well we're already in it, this very heated period of discussion over the future of price increases. Thank you so much. You're welcome. This was really fun.

Thanks for having me. Thank you. That was great. Yeah, appreciative, So, Joe, I found that conversation really really interesting, And again, at a time when we have this sort of polarized perception of the future of inflation, it's really nice to dig into some of the details behind how people are actually thinking about this topic. Yeah, I thought that was super interesting about like even fo of C members you could sort of anticipate their own policy actions simply based on

their own experiences. There lived experiences with inflation, and I think that goes a long way in explaining why this one number is like such a lightning rod. Like everyone has different experiences with pricing. Everyone is different consumption baskets, everyone has different periods where interest rates affected them negatively or positively in one way. And it's uh, the way

people like carry through that for years really profound. Yeah, um, I mean to your point, I think at the beginning of the discussion, everyone sort of either benefit or loses out from different price movements, and there's so many of them and so many factors at play that it's sort of difficult to disaggregate them all and also difficult to come up with as Ulrico was saying this sort of mythical representative inflation survey, responded, The one other thing I

thought was really remarkable in there was this idea that um gender differences in inflation perceptions could be knocked down so quickly just by eliminating grocery shopping. Like I had no idea that that effect was so pronounced. That was really interesting. And then you wonder, it's like, Okay, who get gas more often? Because you hear that gas is

often a big factor. But it really does like think like if you listen to like J. Powell, they're putting so much emphasis on these so called like inflation expectations or the importance of keeping expectations anchored and so forth. But then you look at like, well, what are the foundations of these inflation expectations that are supposedly so important

to policy? And it seems so like arbitrary and subjective in many cases, like where they were formed and so On the one hand, maybe they're powerful, but on the other hand, like, well, we're certainly put it a lot of weight on some things that are like very nebulous and random, right, and quite desperate at that. All right, shall we leave it there, Let's leave it there. Okay, this has been another episode of the All Thoughts Podcast. I'm Tracy Alloway. You can follow me on Twitter at

Tracy Alloway and I'm Joe wi Isn't though. You can follow me on Twitter at the Stalwart. Follow our guest Rique Malmandier. Her handle is at umal Men. Follow our producer Laura Carlson. She's at Laura M. Carlson. Follow the Bloomberg head of podcast, Francesca Levi at Francesca Today, and check out all of our podcast at Bloomberg under the handle add podcast. Thanks for listening to