Home > Uncategorized > FROOPP – or understanding peoples perceptions of inflation (1 graph)

FROOPP – or understanding peoples perceptions of inflation (1 graph)

Carola Binder is somewhat puzzled that so many Europeans see rising prices as one of their two personal top problems (data from May 2012):

I was stunned that three times as many people consider inflation a top issue as consider health and social security a top issue.”

I understand. But we should not confuse macro with micro. And powerful institutions in the Eurozone want people to suffer from higher prices. Many economists (including me) do not see inflation as a pressing macroeconomic problem at the moment or in the foreseeable future. This however does not mean that it’s not an important microeconomic problem. This difference between micro and macro is also indicated by one of the commenters on the blogpost of Binder:

Perhaps you should also mention the response to the previous question, “What do you think are the two most important issues facing our country,” to which the most common answer by far is “unemployment,” followed by “economic situation,” with “rising prices/inflation” a rather distant third“.

For many people, rising prices are a personal problem. And when we look at the data per country, shown in the Blinder blogpost, we see that countries were people see rising prices as an especially large problem are often characterized by low wages and pressures to decrease these already low wages (Estonia, Lithuania, Czech Republic etcetera).   And in all European countries automatic COLA (Cost of Living Adjustment) of wages has been abolished or there are powerful forces who want to abolish it (against the pressing advise of Milton Friedman, by the way). Hard won institutional arrangements to protect people from the consequences inflation are going down the drains, a policy which is of course backed by the usual suspects like the ECB, the European Commission and the IMF (read the Cyprus Memorandum of Understanding).

And there is another reason why people see rising prices as a large problem. The data Blinder uses are from May 2012. Remember that around that time gasoline prices had increased quite a bit. And gasoline is one of the ‘Frequent out of pocket purchases’ items measured by Eurostat.

11a

According to this institution,

“The FROOPP indicator is important for understanding people’s perceptions of inflation. Individuals often feel that inflation rate is higher than that announced by official statistics. Sometimes this is true, if their purchasing behaviour is not average, but often it is a perception they form. This is because their own judgement of inflation is governed more by everyday purchases (found in the FROOPP) than by less frequent purchases, such as electricity bills paid every three months, annual car insurance or television sets or cars bought infrequently.”

Between 2005 and 2013, this indicator increased quite a bit more than either the HICP consumer prices index and the index of core prices, which excludes volatile prices of energy and seasonal food.

The weird thing is not that people are bothered by higher prices. The really weird thing is that an institution which should know about such problems, the ECB, still mistakenly tracks a metric which is essentially a micro-metric (the HICP price index) instead of a macro-metric like the GDP deflator. And tries to make people suffer more from higher prices by explicitly pressing for a new ‘social contract’, without COLA and comparable arrangements. And don’t underestimate the resolve of the ECB – they are getting more and more explicit about their ardent wish to alter the ‘political economy’ of the Eurozone.  As Yves Mersch recently stated, the ECB is quite happy to cross the boundaries of its mandate:

Allow me to point out that over the last few years the ECB has not only been a guardian of stability and among the most interested observers of the various deficit and imbalances procedures, but we have also raised awareness of the need for profound transformations in our political economy and in our societies. We have been advocates of change. In my view, this is our most important unconventional measure…

What a hubris.

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  1. November 2, 2013 at 2:15 pm

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