Francesco D'Acunto

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29 appearances 1 recordings 1 series first heard Mar 2023 last heard Mar 2023

Francesco D'Acunto’s voice in public audio — every appearance, attributed to the second.

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WSJ Your Money Briefing · Inflation Sparks Skewed Memories of Lower Prices · 15 Mar 2023 podcast

Thank you for having me.

Yeah, so this is something that the psychologists call proactive interference with a very complicated term, but it's actually very simple to think about.

So the idea is whenever we try to recall something that has happened in the past, given we have so many memories of things that happened in the past, sometimes we actually tend to recall things that happened a bit farther back in time relative to the one we are trying to guess.

And so in the case of prices, this really has a systematic effect on what people think the prices they observe and they face are, because we know that prices tend to increase systematically over time.

So if I recall something that goes farther and farther back in time, I will tend to recall lower and lower prices.

And that means that I will think that inflation is higher and higher than what it really actually is.

So we did a particular survey in 2022 where we asked a very large representative population of consumers in the US about what they recalled the price of milk was 12 months earlier.

Now, we actually have data that shows us the exact transactions that those people made over the last 12 months.

So we find that more than 20% of those respondents responded

recalls a price of milk that was one quarter, 25% lower than the actual price.

So on average, the price of milk, of the average milk we have in the sample, is about 2.6 US dollars.

So that means about 20% of the sample recalls having paid 50 cents less, more or less, out of a price of $2.6.

So that's quite substantial.

I mean, when we think about that in proportions, that would imply that they actually think that inflation was about like 7-8% higher than what the true inflation was, almost say twice as much as the actual rate of inflation.

So this we find in the data actually explicitly in particular relates to grocery shopping habits.

And that's somewhat potentially surprising because instead when we think about what we spend money on, the larger fraction of our income goes in other types of goods like utilities, restaurants, potentially purchasing cars once in a while, large ticket items.

So we only spend a small fraction of our income on groceries, including, for example, milk and bread.

But what we find in the data is that people really think about those prices very, very often in their mind based on how frequently they go shopping, so how frequently they see those prices.

And in particular, for example, one regularity we have in the data is that there is a very strong gender effect.

So women, for example, typically tend to recall substantially higher inflation over time relative to men.

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