Economists observe human behavior changes with economic circumstances. The changes themselves often mold and shape future economic realities.
It’s been some 40 years since the United States has experienced significant inflation. However, the phenomenon of an accelerated rise in the general price level is rearing its ugly head. Official statistics show the annual inflation rate began increasing in the first months of 2021. A recent public opinion poll indicated that a combined 83% of the population was either very (57%) or somewhat (26%) concerned about inflation.
Fortunately, information about inflation is much more available today than it was in the early 1980s. This should help consumers, businesses and others better cope with it. In 1997, the U.S. Treasury started offering the public Treasury Inflation Protected Securities. These are government bonds indexed to the standard measure of inflation: the consumer price index. Invest $10,000 in a 10-year TIPS today, and if the CPI rises 30% over the period, the bond’s payout at maturity will be $13,000.
Although the ostensible purpose of TIPS is to provide investors/savers with an inflation-proof security, TIPS also provide the public with information about inflationary expectations. Economists point out that the difference in the rate of return on a U.S. Treasury-backed TIPS bond and the rate of return on a non-inflation-indexed Treasury bond of identical duration measures the financial market’s expectations about inflation.
Fortunately, the Federal Reserve of St. Louis’ data website, fred.stlouisfed.org—also a post-1980s innovation—calculates the spread between the two bonds on a daily basis. At the time of this writing, it stood at 2.64% on 10-year bonds, the highest inflation expectation since 2011.
Bohanon engaged in another inflation-coping strategy that is more problematic. Having gotten accustomed to less-than-brimming shelves at his drugstore and noting his favorite bottled water on sale there, he cleaned the shelf and bought all six bottles. Inflation leads consumers to expect shortages and higher prices in the future, so stock up now! This adds fuel to upward price pressure, making inflation a self-fulfilling prophecy. More dollars turning over more often chasing the same goods and all that. This is one time when “folk economics” is true.
We all hope that rising prices are short-run and self-correcting. No one wants inflation. However, the cat might already be out of the bag as consumers adjust their behavior. It might be hard to get kitty back in.•
Bohanon and Curott are professors of economics at Ball State University. Send comments to firstname.lastname@example.org.