Issues like the causes of inflation are often complex to understand, but their importance when it comes to choosing a policy is immense. Therefore, economic communication plays a critical role in the orderly access and flow of information to the public – why are prices around us rising, how much will they continue to rise and what can be done to stop this? The answers to these questions create the expectations for inflation, which the more accurate – the better economic people can make.
Researchers from Germany and Denmark last month published a unique study that aims to measure the impact of the “economic narrative” of important data, such as inflation expectations, as reflected in the media and other information consumption channels. In addition, the study outlined the common biases in the public and in the media regarding inflation factors, in relation to expert positions on the same topic.
Households focused more on supply
The study was conducted in the United States and included 8,000 ordinary people (“households”), who are a representative sample of the American population, and 100 experts from academia who published articles on inflation in important economic journals. (6.2% annual inflation, compared to 1.5% -2.5% typically.) Then, they asked both experts and households to answer an open-ended question: “What factors do you think led to an increase in the inflation rate?”.
For example, one household wrote the following answer: “I think the main reason for the high inflation rate in the last year is probably the plague.” Another household wrote that “manufacturers are raising prices on products and services, claiming that the impact of the plague has forced them to do so.”
A third household blamed the political situation: “I totally believe our president is responsible for the inflation disaster. He is not a leader properly, and the public is scared. Prices are going up because of this fear. Our president has not helped with the corks of container ships sitting in ports.”
The researchers compared the narratives that came up in households to those that came up in the experts. One of the most notable differences is the complexity of the narrative: while experts brought in an average of 4.3 factors for inflation, the narratives of households were generally simpler and included an average of 3.5 factors.
Additional differences are rooted in the causes themselves. Households focused on the supply side and neglected the demand side in relation to expert positions: while only 17% of households cited significant government spending in aid packages as one of the reasons for inflation, 50% of experts indicated this in their explanations. The same is true of monetary policy – 38% of experts referred to it, but only 5% of households gave their opinion on it. The changes in demand were noted by 16% of experts – but only by 1% of households.
There were gaps on the supply side as well, but smaller ones: 29% of households referred to supply chain disruptions, compared with 58% of experts. Regarding the shortage of workers (27% of households, 24% of experts) and the energy crisis (14% of households, 15% of experts) the results were almost identical.
Republicans blame President Biden
The strongest bias in household explanations versus experts is in politically charged issues. For example, 32% of households referred to the failure of the ruling party or specific political factors, compared to only 1% of experts. 8% of households referred to an arbitrary “price expropriation” resulting from corporate greed, while none of the experts saw it as an economic explanation for inflation. These explanations were divided according to the political bias of households: while those who identified as Republicans were more likely to blame the current (democratic) administration, those who identified as Democrats were more likely to accuse corporations of expropriating prices as a result of greed.
Next, the researchers sought to know how the economic narrative affects household inflation expectations. Inflation expectations dictate many economic behaviors, such as the rate of savings and pricing of CPI-linked bonds. The more accurate it is, the more informed economic decisions can be made.
Those who referred to monetary policy added a whole percentage to their inflation expectations in the short term (one year), but not the long term (5 years). Those who addressed supply chain problems added half a percent to short-term inflation expectations, but nothing statistically significant in the long run. Those who addressed a politically charged administrative failure added 1.2% to inflation expectations in the short run, and 0.8% in the long run. The same is true of those who referred to price expropriation, but to a lesser extent (0.7% in the short term, 0.6% in the long term).
In the third stage, the researchers directly addressed the impact of economic communication on narratives. The researchers wanted to examine how the economic news that people consume affects the crystallization of their narrative regarding inflation. They asked them to search the internet and read an article on the net. One group – on an unrelated topic (attractions for tourists in Miami) and a second group – on inflation in the US. The next day, the researchers asked them to describe what they thought was causing inflation.
Those who read the articles were influenced by them – the amount of inflation factors they counted was 10% higher. Inflation expectations have also changed as a result of reading the articles, depending on the factors being read.
It is even more interesting to see what happens in the articles themselves: they are closer to experts than to households in most factors, but the most striking thing is the sheer amount of reasons they address. Some of the factors are presented only as a “transient reference” as the researchers say, without delaying or delving into them.
The challenge facing the economic press
When it comes to complex issues such as changes in demand and monetary policy – a superficial explanation may fail to bring an accurate perception of the situation. This, in turn, encourages people to find “alternative” explanations – in generic accusations against the other political camp or against corporations in the economy, when these explanations are not significant in the eyes of the experts.
These facts pose a challenge to the economic press, in coming to describe complex economic moves with a major impact on the public. Because the media influences the economic behavior of the public, it creates an economic reality and not just reports on it. The responsibility placed on it is especially great in such situations, because there is no conceptual vacuum. If people do not know the exact explanations, they will explain the reality to themselves anyway – even with less accurate explanations.