The new “inflation” threat

Weekly Updates

One of the great tragedies of modern civilization is that humanity is underendowed with rational economists. Ordinary people are irrational, even emotional in their economic judgements. Consumers’ inflation perceptions are one example. Consumers are predisposed to focus on the price of things bought frequently, remember price increases, and forget price declines.
This is why consumer inflation expectations correlate very strongly with the inflation rates of food and auto fuel. The increase in price of a daily Snickers bar is remembered, the drop in price of a new television is forgotten (or never realized).
The universe of high-frequency purchases may now include electricity. Technically, this has always been a frequent, indeed continuous, purchase. What has changed is its visibility. In recent years, the use of “smart meters” by households has increased dramatically. Around three quarters of US households now have a smart meter. In the UK, the number is approaching two thirds.
Smart meters change how frequently electricity prices are seen. Consumers can view both consumption and cost on at least an hourly basis on their phones. The result is that electricity prices have joined the universe of high-frequency purchases. They are likely to play a major role in shaping inflation perceptions—and thus political concerns about affordability.