What Makes People Think Like Economists About Inflation?
By Bryan Caplan
In the roughly 20,000 responses we have received from our telephone
survey since August 1998, the average rate at which respondents thought
prices had risen over the previous 12 months was about 6.0 percent. This
“perception” of inflation is more than twice the rise recorded by the
Consumer Price Index (CPI) over the same period (2.7 percent). Further,
if we separate our sample by gender, we find that the average inflation
perceived by the nearly 8,500 men who answered our survey was 4.6
percent. While this response is higher than the official CPI inflation
estimate, it pales in comparison to the 6.9 percent inflation perceived
by the roughly 11,500 women who took our survey. What accounts for such a
large discrepancy between the inflation rate perceived by the two
The data indicate that the public’s estimates and predictions of
inflation are significantly and systematically related to the
demographic characteristics of the respondents. People with high incomes
perceive and anticipate much less inflation than people with low
incomes, married people less than singles, whites less than nonwhites,
and middle-aged people less than young people. This Commentary describes
what is perhaps the most curious observation of all: Even after we hold
constant income, age, education, race, and marital status, men and
women hold very different views on the rate at which prices are
Tyler proposes some typically nuanced explanations. What amazes me, though, is how consistent Bryan and Venkatu’s results are with my 2001 JLE piece, “What Makes People Think Like Economists?” Namely:
1. The public is strongly biased in a pessimistic direction (thinking inflation is higher than it really is).
2. Women are more biased than men. (More details in this unpublished piece).
3. The fact that higher income predicts less biased beliefs about inflation might seem incompatible with my JLE results. But my finding that income doesn’t make people think like economists only holds controlling for education. Bryan-Venkatu says that the gender gap persists after controlling for education, but doesn’t say whether or not the income result persists controlling for education.
Bottom line: As far as I can tell, there’s nothing special about the public’s systematically biased beliefs about inflation. Instead of offering ad hoc explanations, economists and psychologists should step back, see the big picture of economic bias, and try to find some overarching explanations.