The Psychology of Inflation: What Makes You Say, "No Way Am I Paying That"?

Value varies. Invest in what’s valuable.

It’s a well-recognized human bias to feel losses more acutely than gains. Perhaps something similar occurs with inflation. As essentials soar in cost–i.e. non-discretionary expenses such as shelter, food at home, utilities, childcare, healthcare insurance, etc.–our only response is sighing resignation: yes, it’s a ripoff but there’s little we can do about it without making major changes in our lives.

Discretionary purchases are a different matter. The pleasures gained by the purchase are significant enough to be worth the financial cost. But at some point–a point that varies with each individual–the cost is so high that the pain of that expense outweighs the pleasure of the purchase.

This may explain why the public mood is sour despite the rosy statistics of economic expansion. The experiential gains of abstract economic stability do not outweigh the acute pain caused by soaring costs for pleasures that were far more affordable just a few short years ago.

Put another way: economically speaking, what is unseen statistically may have more impact that what is seen. So GDP is rising, blah-blah-blah, but can you believe I just paid $56 for a nothing-special breakfast for two people?

You see and hear these experiential leverage points all the time now: if you take a moment to observe the shoppers in the meat aisle, you see many lookie-loos: people go to the “sale” cooler for steaks, look at the price, shake their heads and walk to the discount bin to paw through what little is left.

Or you hear another shopper mutter, “I’m not paying that!” after glancing at the price.

Even well-off retirees are appalled when a fast-food meal that a few years ago would have been covered by a $20 bill now requires a $20 and a $10.

Millions of households have canceled cable TV service due to the soaring costs and marginal quality of the offerings. “Basic cable” that provided low-cost access to local channels has vanished, replaced by a “basic premium (of course) service” that costs four times more.

As long as the credit card had plenty of spending power, people didn’t seem to feel any pain as costs soared. $400 per day for a nothing-special room in a nothing-special resort, no problem. $100 to change the oil in the car, no problem. And so on.

But once the funds available for discretionary spending dry up, sensitivity to financial pain increases.

But just as consequential as availability of discretionary funding is the internal measure of value. The well-off retiree can easily afford the fast-food meal, but the pain exceeds the pleasure because the meal simply isn’t worth the price.

The perception of value varies significantly. Time, place and individuals all vary. What seems costly in one circumstance may offer high value to someone else. But if we plot all these unseen data points, we sense a change in the tide: a great many discretionary purchases are no longer worth the cost.

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