Cecil Bohanon & Nick Curott: Consumer reactions add fuel to rising prices

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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 ibjedit@ibj.com.

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3 thoughts on “Cecil Bohanon & Nick Curott: Consumer reactions add fuel to rising prices

  1. It’s been said that many of the people who voted for Biden and the associated mess he and his handlers have deliberately created, are rolling over in their graves.

    1. And many others rest easy, knowing that he’s still cleaning up after four hellish years of self-aggrandizing mismanagement (of Afghanistan, of budget deficits, of the pandemic).

  2. Typical liberal left retort to anyone pointing out realities of liberal governance … blame the previous leader of the opposite party. How about taking responsibility for actions taken by the actual leaders that are responsible for a change? The authors article strikes me as “majoring on the minors”. More constructive is to point out policy failures that fuel inflation. Curtailing energy exploration and production by implementing regulations to curtail energy exploration and production, mandating vaccines that instantly reduce the numbers of workers in the workforce, perpetuating fear as a means of citizen control, handing billions of dollars of US weaponry to terrorist enemies of the US, looking the other way when “activists” assault federal property, while vigorously prosecuting your political opponents for similar crimes …, going beyond “never let a good crisis go to waste” … to “do everything possible to create and perpetuate as many crises as possible as often as possible” … like not taking action to get cargo boats docked and unloaded. Such inaction ensures the supply chain disruption will continue. These are the root causes of inflation. How about majoring on the majors?