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How consumers think about inflation

Opinion & Analysis
With inflation rising to levels unseen in decades, households across the world are asking themselves how much more they can expect to pay for fuel, groceries, and other necessities.

How consumers think about inflation A DEEPER understanding of how consumers think about the economy would help policymakers control inflation.

With inflation rising to levels unseen in decades, households across the world are asking themselves how much more they can expect to pay for fuel, groceries, and other necessities.

Their answers may help them make important personal financial decisions.

Should they go ahead and buy that new refrigerator, rather than wait until later and risk seeing the price go up? Should they ask their boss for a raise to make up for the loss of purchasing power?

The answers won’t affect just individual households, but the economy as a whole. The reason: central bankers and academic economists view inflation partly as a self-fulfilling prophecy.

If consumers believe prices will rise at a faster pace, they may behave in ways — buying a refrigerator or asking for a raise — that will fuel more inflation.

More money chasing a fixed number of refrigerators will drive up their price, and more people asking for a raise will prompt employers to mark up the prices of goods or services they sell to make up for higher labour costs.

Financial authorities feel they cannot allow a wage-price spiral to happen, and cannot allow inflation expectations to become unanchored.

It’s just something that they cannot allow to happen.”

Policymakers should carefully monitor households’ and firms’ inflation expectations, measured through regular surveys, at different time horizons.

In particular, increased forecasts for inflation in three to five years signal that expectations are becoming unmoored and that an interest rate increase may be needed to keep inflation under control.

This also explains why central banks try to shape the public’s expectations of future developments by explaining their current and future policies.

Indeed, the success of policymakers’ actions crucially relies on their ability to convey the intended effect to households and steer their expectations accordingly.

All this raises an important question for academics and policymakers alike: How well do we understand households’ expectations?

Over the past decade, a large body of behavioural economics research has dug deep into this question.

The main findings are that households hold very disparate views on inflation and tend to perceive it as higher and more persistent than it usually is.

Consumers also tend to disagree on the outlook for inflation more than experts do, they change their view less often, and they often rely on a few key products they consume regularly — such as coffee and gasoline — to extrapolate changes in the overall cost of living.

Furthermore, individual expectations are strongly correlated with demographic characteristics including sex, age, education, and political orientation.

For instance, women and people with less education or lower incomes tend to expect higher inflation. Finally, past experiences — such as living through the Great Depression or the 1970s Organisation of the Petroleum Exporting Countries (OPEC) oil embargo, which drove inflation sharply higher, can strongly shape people’s perceptions of inflation for the rest of their lives.-Pizzinelli

Politicians must stop empty promises I HAVE often wondered if I should get involved in the world of politics, but then I realise it’s not for me. The way I see it, despite the best of intentions, it seems that, in the end, the system swallows you up and you never achieve your original plans and aspirations.

I have watched Western politics over the past few years with complete amusement and my only conclusion is that the so-called African dictators must be laughing their heads off at the moment. Finally, Western politicians are following what they have accused others of for years — corruption, changes of laws to suit themselves and refusing to leave office.

My question is: What is going on? It’s hard to believe the state of our politics at the moment.

Don’t get me wrong, the political situation in Zimbabwe is far from ideal and there are things that happen which are questionable; but for years, the world has considered the United Kingdom (US) and American politics to have much higher standards.

It’s still hard to believe that the Donald Trump era really happened and the present UK government is adamant that the current crisis will pass and people will simply forgive and forget. Well, I suppose time will tell.

I do enjoy a good political discussion and BBC’s Question Time on a Thursday night is a weekly highlight, giving us an opportunity to listen to different people’s views

Listening to people explain why they have voted for Trump or the current government for example, the motivation they all have in common is the need for change and the frustration with empty promises made by politicians in the period leading up to elections.

However, the post-election period never seems to reflect these promises and, to many, the system feels broken; not just here but the world over with no obvious solution. What seems to be lacking is a base of politicians with relevant life experience who are therefore driven to institute real change.

I remember feeling excited as a 19-year-old getting my voting card for the first time and no, it wasn’t in Zimbabwe, but right here in the UK. At that time, it was the end of an era for the Tories and the beginning of the New Labour Party with an enthusiastic young leader — Tony Blair. That was when my interest in politics really heightened.

There was no doubt that people wanted change and Blair sounded energetic and passionate. Listening to his campaign song, Things Can Only Get Better, I was enthused by him, happy to listen to him talk as he didn’t seem to mince his words. He was straight to the point and always spoke in a direct and forceful manner.

So, setting off with my card to the ballot box, I joined many others in putting my X in his box and Labour went on to win the election. Sadly, however, my admiration and support for Blair vanished quickly with his decisions over the Iraq war which led to protests in the British streets proclaiming how wrong the war was.

It’s only now that we are finding out the real reason behind that war and why Iraq is in such a mess.

More information is also now available on how his government dealt with the so-called white farm invasions in Zimbabwe.

I felt so much shame when hearing reporters constantly speaking about how the Zimbabwe government was persecuting white farmers; but I heard no reports whatsoever about the fact that Clare Short, who was the International Development Secretary in Blair’s government, decided that Britain no longer had a responsibility to meet the cost of land purchases in Zimbabwe — going completely against the commitment made during the 1979 Lancaster House talks in which Britain committed to funding the land redistribution programme.

So over the years I have voted for different parties and as the next election looms I am in a dilemma as to who I should vote for.

I listen to as many different points of view as possible and I am sure I am not alone in questioning what politics is really about nowadays.

After so many battles in the past which have given us the right to vote I will always use it.

But I have to question how long the politicians can keep making these empty promises.

In order to keep the population interested in politics and willing to support whichever government, they have to find a way to restore our confidence and our belief that honesty and fairness will play a part in their decision-making.-Anna Mudeka

Zim’s year ahead: Grim but not hopeless THE year ahead for Zimbabwe is looking grim. The vast majority of the population will continue to suffer, and its leaders will continue to blame others for their own failures.

Friends of Zimbabwe in the United States had hoped that the end of the Robert Mugabe era and the glaring unsustainability of the country’s economic governance model — which has resulted in a shrinking economy and one of the world’s highest inflation rates — would trigger meaningful reforms that could attract international support.

Those hopes have been thoroughly extinguished by President Emmerson Mnangagwa and his ruling Zanu PF party, who have established a record of violently intimidating political opponents, protecting corrupt command economy schemes that benefit the elite, and disregarding the country’s own Constitution.

Nearly eight million Zimbabweans, roughly half of the population, are food-insecure, as years of drought have devastated the country’s agriculture.

Zimbabwe’s plight is one of many painful testaments to the consequences of climate change in a region that contributed very little to the problem.

But the effects of the drought are so severe because the country is in such a vulnerable and weakened state, the result of decades of self-serving leadership.

Some suggest that the dire conditions in the country could prompt another party-managed leadership transition.

But changing faces at the top of a structure that offers economic opportunity only to the well-connected few cannot bring relief to the country.

Only a genuine commitment to a different kind of governance, one that prioritises citizens’ needs and the rule of law, can lift Zimbabwe out of the painful rut in which it is mired.

Zimbabwe’s neighbours in southern Africa have shown little appetite for wading into the country’s toxic politics, but the drag that Zimbabwe’s crisis has on regional growth cannot be completely ignored.

Thus former South African President Thabo Mbeki in 2020 initiated talks with government and opposition leaders in a regionally-backed attempt to find a political framework for the country’s recovery.

While few expect miraculous results, it is important to remember that Zimbabwe’s situation is not, and has never been, hopeless.

Many people are simply struggling for survival, but others continue organising to articulate a way forward for the country.

Brave lawyers, journalists, community organisers, and others continue to defy intimidation in exposing government corruption and incompetence and insisting on justice.

Of course, a robust and expeditious international response to the country’s urgent humanitarian needs is essential.

But it will be equally important to elevate the voices of Zimbabwean civil society in the difficult year ahead to stave off resignation and find a way out of the crisis.-Michelle Gavin