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“Real-Feel” Inflation: Quantitative Estimation of Inflation Perceptions

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  • Michael J Ashton

Abstract

Inflation expectations are believed to influence actual inflation and therefore policymaker actions. However, methods usually employed to evaluate inflation expectations are insufficient. Survey methods either record economists’ forecasts of the official Consumer Price Index (CPI) (which isn’t what policymakers need to know) or consumers’ attempts to calculate their own inflation experience. Consumers have little chance to perform the calculations needed to accurately compute inflation. I propose functional forms to substitute for the heuristics consumers actually use to form inflation perceptions. I also propose adjustments to reconcile official price measurements with consumers’ perceptions. These adjustments are corrections for cognitive biases related to loss aversion and mental accounting.

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  • Michael J Ashton, 2012. "“Real-Feel” Inflation: Quantitative Estimation of Inflation Perceptions," Business Economics, Palgrave Macmillan;National Association for Business Economics, vol. 47(1), pages 14-26, January.
    • Handle: RePEc:pal:buseco:v:47:y:2012:i:1:p:14-26
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    Cited by:

    1. Sandor Axelrod & David E. Lebow & Ekaterina V. Peneva, 2018. "Perceptions and Expectations of Inflation by U.S. Households," Finance and Economics Discussion Series 2018-073, Board of Governors of the Federal Reserve System (U.S.).
    2. Marianne, Ojo, 2014. "Central bank independence, policies and reforms: addressing political and economic linkages," MPRA Paper 54205, University Library of Munich, Germany.

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