How inflation affects consumer behavior

How inflation affects consumer behavior

Driven largely by high gasoline prices, inflation hit levels not seen in decades over the past year, according to the new Consumer Price Index. data. Prices at the pump helped accelerate inflation to 8.6% during the 12 months ending in May, CNN reports, and it appears to have no end in sight.

Such price disruptions are sure to have impacts on consumer behavior. Market observers have suggested that a “inflationary psychology” is beginning to set in, describing a situation where consumers expect future prices to be higher than current prices, creating less resistance to spending in the short term.

As some consumers are willing to spend more to get ahead of inflation, businesses are also willing to raise wages, raising fears of a “wage and price spiral,” or what is known as inflation. Self-fulfilling prophecy.

Inflationary psychology may be just one ingredient driving a spiral of wages and prices, says roy smead, associate professor of philosophy at Northeastern, who researches the evolution of social behavior. But the situation is multiple and it is difficult to predict how consumers will respond to rising prices throughout the economy.

“Like anything in economics, you’re dealing with a really complex system,” says Smead. “Sometimes economists look at one or two aspects of the situation that we can understand; but what could cause inflation in one context could cause deflation into another based on what else might be going on in the background.”

Rory Smead, associate professor of philosophy, poses for a portrait. Photo by Ruby Wallau/Northeastern University

Smead says that one factor that observers might miss regarding current economic conditions is how educated and in touch with economic news consumers are today compared to decades ago. Social media and the 24/7 news cycle have helped push information in such a way that consumers develop “widespread inflationary expectations” which in turn influence their behavior, he says. bruce-clarkassociate professor of marketing at the D’Amore-McKim School of Business.

“The first question we could ask ourselves is: Do they have [consumers] even notice? Bruce says, “Do you realize that the prices have changed, and if so, is it from personal experience or from other people telling you so?”

A person’s financial situation greatly influences how they respond, he says.

“If you’re doing fairly well, inflation can be annoying, but it doesn’t bother you that much,” he says. “You can order a less expensive meal, spend more of your savings, for example. He may only rely on you for larger purchases, like when he’s buying a house.”

Bruce Clark, associate professor of marketing at Northeastern University. Northeastern University photo

Clark says research shows that consumers, in general, notice price fluctuations in items they’ve purchased. Recentlyand what do they buy frequently. You’re more likely to notice a change in the price of coffee, for example, compared to the toothpaste you buy every six months, she says.

And then there’s the price of gasoline, the most visible marker of inflation, which historically plays a “huge role in how consumers view prices in the economy,” so much so that even many people who don’t drive or buy gas are aware of it. that, Clark says.

The so-called “advance buying” that characterizes the spiral of wages and prices is observed mainly in items that can be stored, such as certain types of food. But how much do consumers speed up their purchases during inflationary periods?

“One of the arguments against this is that the other that we see in an inflationary environment is that certain people can become more insecure,” says Clark.

Concerns that the US economy may be heading into a recession may also influence consumers’ thinking about the future. Some consumers may respond by cutting back on spending for fear of losing their job or reducing their hours, Clark says.

But one thing is for sure: once the cycle of inflationary psychology begins, it is difficult for policymakers to stop it.

“Even figuring out how to fix or design policy around these outages can be really maddeningly complicated,” says Smead.

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