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Comments on: Inflation psychology http://www.tvhe.co.nz/2008/02/26/inflation-psychology/ The Visible Hand in Economics Tue, 26 Feb 2008 03:47:26 +0000 hourly 1 https://wordpress.org/?v=6.9.4 By: Matt Nolan http://www.tvhe.co.nz/2008/02/26/inflation-psychology/#comment-980 Tue, 26 Feb 2008 03:47:26 +0000 http://tvhe.wordpress.com/?p=258#comment-980 Ahhh cool, I do that sorta stuff constantly.

Its all this damn work – its melting our brains!

]]> By: CPW http://www.tvhe.co.nz/2008/02/26/inflation-psychology/#comment-979 Tue, 26 Feb 2008 03:45:30 +0000 http://tvhe.wordpress.com/?p=258#comment-979 Man I’m struggling today! Should have been “overstate” not “understate”.

]]> By: Matt Nolan http://www.tvhe.co.nz/2008/02/26/inflation-psychology/#comment-978 Tue, 26 Feb 2008 00:12:58 +0000 http://tvhe.wordpress.com/?p=258#comment-978 “I personally believe that CPI measures tend to understate inflation and that over the long-run real wage growth has probably been a lot stronger than traditional estimates suggests”

I’m confused, if CPI understates inflation, then wouldn’t real wage growth be weaker then we currently have on record?

]]> By: CPW http://www.tvhe.co.nz/2008/02/26/inflation-psychology/#comment-977 Tue, 26 Feb 2008 00:11:06 +0000 http://tvhe.wordpress.com/?p=258#comment-977 whoops that first post should have said “purchase durable goods infrequently”

]]> By: CPW http://www.tvhe.co.nz/2008/02/26/inflation-psychology/#comment-976 Tue, 26 Feb 2008 00:09:50 +0000 http://tvhe.wordpress.com/?p=258#comment-976 I personally believe that CPI measures tend to understate inflation and that over the long-run real wage growth has probably been a lot stronger than traditional estimates suggests – mainly because CPI measures probably fail to measure quality improvements and substitution effects correctly. From memory one common estimate suggests this adds 1%pa to the “true” CPI in the US, I don’t know if the result for NZ would be similar.

]]> By: Matt Nolan http://www.tvhe.co.nz/2008/02/26/inflation-psychology/#comment-975 Mon, 25 Feb 2008 22:13:49 +0000 http://tvhe.wordpress.com/?p=258#comment-975 Hi CPW,

What you said is all very true.

The one counter-argument that might come up is if someone states that we ‘under-estimate inflation’ – therefore its not the household and firms with a biased outlook, but economists.

“Maybe this is why people believe that real wages are often falling.”

Indeed. Very interesting.

]]> By: CPW http://www.tvhe.co.nz/2008/02/26/inflation-psychology/#comment-974 Mon, 25 Feb 2008 20:59:51 +0000 http://tvhe.wordpress.com/?p=258#comment-974 I read once that part of the problem is that people only purchase durable goods, which tend to be the things most likely to be falling in price (e.g. cars, lcd tvs) rarely, and hence they underestimate their impact on the total price level.

The marketscope survey of inflation expectations put out by the RB suggests that consumers tend to overestimate the CPI consistently by 1-1.5%pa. Maybe this is why people believe that real wages are often falling.

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