Real-feel inflation: Quantitative estimation of inflation perceptions

Abstract

Inflation expectations are believed to influence actual inflation and therefore policymaker actions. However, methods usually employed to evaluate inflation expectations are insufficient. Survey methods either record economists forecasts of the official Consumer Price Index (CPI) (which isnt what policymakers need to know) or consumers attempts to calculate their own inflation experience. Consumers have little chance to perform the calculations needed to accurately compute inflation. I propose functional forms to substitute for the heuristics consumers actually use to form inflation perceptions. I also propose adjustments to reconcile official price measurements with consumers perceptions. These adjustments are corrections for cognitive biases related to loss aversion and mental accounting. © National Association for Business Economics.