Europeans Have No Idea What Inflation Is

June 26, 2013


Carola Binder has a blog post that beautifully illustrates a confusion. She shows that 45% of Europeans consider inflation to be a big problem, far more than those who worry about unemployment. Even in Greece 26% view inflation as the big problem, only slightly below the 30% for unemployment. Only the Swedes are economically literate. And keep in mind that there is virtually no inflation in Europe, indeed the price level would probably be falling, if measured using a reasonable index.

Because people wrongly equate “inflation” with “having trouble paying my bills” (i.e. falling RGDP), the European public would actually prefer a policy of higher inflation, as it would lead to higher RGDP, and hence people would have an easier time paying their bills. They just don’t know it.

For the same reason we should pay no attention to polls showing people don’t care about health care inflation. With third party payment systems, the main effect of health care inflation is to keep median take home pay from rising as fast as otherwise. If you want to understand how people feel about health care inflation, you’d be better off asking them how they feel about stagnating real incomes. Oh wait, I forget that the public doesn’t know what real incomes are. So ask them about inflation. They’ll say they care a lot about inflation, which means they actually care a lot about stagnating real incomes, which means they actually care a lot about rising health care costs.

Or you could just stop polling the public on economic questions.