Are We More Sensitive to Price Increases Than Decreases?

Erika Miller, correspondent at Nightly Business Report, expressed surprise that the CPI showed prices declined year-over-year by 0.2%:

“It came as a total surprise to me that grocery prices have fallen nearly 3 percent in the past year, one of the biggest category declines. I would have guessed prices at the supermarket were up.”

Ms. Miller speculates that we are more sensitive to price increases than price decreases. Thus, recent surges in the price of products and services like fuel and healthcare gain a lot more attention from consumers than small declines in grocery bills. (Of course, there is also the problem that stagnation in housing prices over the past year have compressed effective earning power at the same time that the costs of so many other things have increased – see Inflation Watch for numerous examples).

So, while the CPI reports a smoothed number that averages out the balance of pricing pressures in the economy, it could be that surges in the prices of certain items in a consumer’s basket of goods can influence expectations of future inflation much more than small decreases elsewhere. If this characterization is correct, it highlights the importance of having a comprehensive approach to battling inflationary pressure that looks at all the moving parts.

As an old quip points out – on average, you will feel fine if your head is in the oven and your feet are in a bucket of ice, but this setup is not conducive to healthy living!

(Note: This post also appears on Inflation Watch where my partner and I document the “real-time” evidence of inflation. We are watching for inflation because the Federal Reserve and the CPI won’t.)