Behavior and Inflation

Inflation during June of 2022 came in at 9.1% over the previous 12 month period. The Federal Reserve branch of New York put out a survey to consumers and concluded that their attitudes towards inflation is that it will decrease over the next one, two and three years, down to about 6.2%, 3.2%, and 2.3%, respectively. This is a relatively optimistic view towards the pricing of goods by individuals, as there are significant factors said to be playing into the present-day inflation, like supply chain issues and significant increases to the money supply that could behold long term effects. 

How does attitude towards future prices of goods build the momentum of consumer spending in the present? If an individual sees gas prices are falling to $4.09 today, even if they are not at the levels they were two years ago, their behavior, if it had changed at all when gas prices were $5.09 a gallon, might diverge back to the behaviors exhibited in their spending habits when gas was $2.59 a gallon. That person’s psychological attitude towards spending money becomes comfortable again, as they want to consume goods, but they are now spending more money at a level of their baseline comfort. This could simply be a hypothesis that consumers comfort and attitude merely falls back to baseline after “shocks” to their spending behavior and wallets, regardless of whether the reality of the spending falls in line to what it was prior to significant price increases.

I generally believe that people, on average, want to consume goods. Purchasing goods makes one feel good. Positive feelings, likely induced by dopamine as you make certain purchases, increases the likelihood someone is going to purchase a non-necessity item. I am not sure today I quite know exactly why that would be, if it is true. Perhaps it is an aspect of possession. Or it could be an aspect of perception, from either one’s self or from others. 

What exactly is rational behavior by consumers is up for debate, and not at an aggregate level either, but at the individual level. Humans are pretty differentiated from one person to another, relative to other species of living creatures. That brings differentiated psychological perceptions and behaviors. Everyone has highly differentiated understandings and needs in their worlds. You can’t expect everyone to live as penny pinchers or expect everyone to go out and make every purchase they desire. 

I would make another hypothesis, without diving into economic data, that the average individual tends to skew more towards the extreme spender spectrum than the extreme saver spectrum. You could think of this as how much of one’s income one spends. The extreme spender end might spend 250% of their income (through the means of their income plus taking on debt) to the extreme saver end who spends 25% of their income.  I would also make the hypothesis that this average is moving more and more towards the extreme spender as well when visualizing a normal distribution of consumers, of which would be tied to the inflation we aim for as a society year over year. 

So behavior may keep reverting back to the normal as prices rise. The average individual falls back to their own desire to make non-essential purchases over and over through time as prices of goods keep rising and rising, potentially putting the average consumer worse off over the short and long term coupled with the thought that wages are not following the same rate as inflation for the average consumer. 

The general hypothesis here is that consumer’s spending behavior does not change in an increasing price environment over time. An increasing price environment is naturally the way our system wants to work. This isn’t taking into account the possibility of extreme situations like a hyperinflation environment, but I think there will be much to learn when our current spell of inflation ends in the U.S. from a consumption standpoint as well as a marketing standpoint.


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