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Frequency bias in consumers׳ perceptions of inflation: An experimental study

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  • Georganas, Sotiris
  • Healy, Paul J.
  • Li, Nan

Abstract

We investigate whether the perception of economy-wide inflation is affected by the frequency with which various goods׳ prices are observed. We provide novel experimental evidence that consumers׳ perceptions of aggregate inflation are systematically biased toward the perceived inflation rates of the frequently purchased items. This ‘frequency bias’ may affect consumers’ consumption and investment decisions, and thus have important macroeconomic consequences. It may also explain why consumers typically over-estimate inflation in surveys during periods where frequently purchased non-durable goods are inflating faster than durables.

Suggested Citation

  • Georganas, Sotiris & Healy, Paul J. & Li, Nan, 2014. "Frequency bias in consumers׳ perceptions of inflation: An experimental study," European Economic Review, Elsevier, vol. 67(C), pages 144-158.
    • Handle: RePEc:eee:eecrev:v:67:y:2014:i:c:p:144-158
    DOI: 10.1016/j.euroecorev.2014.01.014
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    More about this item

    Keywords

    Inflation perceptions; Biases; Laboratory experiment;
    All these keywords.

    JEL classification:

    • C91 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Individual Behavior
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • C82 - Mathematical and Quantitative Methods - - Data Collection and Data Estimation Methodology; Computer Programs - - - Methodology for Collecting, Estimating, and Organizing Macroeconomic Data; Data Access

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