Économie et Statistique n° 447 Perceived Inflation - The Choice between Employment and Inactivity for Mothers of Young Children - Home insurance in Overseas Deparments - Place-of-residence Effects on Access to Employment
For the past several years, consumers' personal opinions on inflation, measured by the household survey, overestimate-on average-the inflation rate as determined by the consumer price index (CPI). We begin by offering two possible explanations. The first is socio-political. Consumers form their views on inflation not from their own observations of the prices of goods and services, but on the basis of a collective construct that functions like a rumour. Generated by distrust of official information, which it feeds in turn, the construct is amplified by media coverage of economic events. The second approach postulates, on the contrary, that consumers do observe price changes for different items and-like statistical institutes-arrive at their assessment of inflation by averaging the individual changes. Under this assumption, the gap between perceived inflation and the CPI is due to differences in the weightings used (statistical institutes refer to an average consumer basket, while consumers use their own expenditure breakdown) or to divergent assessments of price movements for individual products. After discussing both approaches and emphasizing their inadequacies, we describe a third approach based on the information available to consumers and to their purchasing status. The core mechanism has two components. First, consumers observe price changes all the more easily if they buy the corresponding products more often. Second, consumers tend to attach greater weight to rising prices than to stable or decreasing prices, as the former can unbalance their budgets. Thus, because perceived inflation does not take sufficient account of decreasing prices, it consistently exceeds the CPI.