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Fear of rising prices and consumer buying decisions play a role in driving inflation

"Inflationary Psychology" phenomenon
Posted at 7:39 AM, Apr 25, 2022

BALTIMORE — Rising prices on just about everything people buy has many thinking about how they spend their money.

The psychology behind many buying decisions could be driving some prices even higher.

It's a phenomenon called "Inflationary Psychology."

It's rooted in basic economics of supply and demand, how people feel about rising prices in deciding what to buy, how much and when.

Just the word inflation itself is enough to cause people to have concern.

The pain of inflation is something consumers feel anytime and anywhere they spend money.

Prices are a lot higher now than before and keep going up with seemingly no end in sight. How people think and feel about inflation causes them to make decisions on how they spend their money.

For example, a consumer with a few extra miles on their car, more than they would like, and they were thinking of getting a new one later this year. Instead, they make a decision to buy it now because they’re worried inflation could have the car they want costing even more if they wait too long. There's a chance their buying decision is helping to drive inflation higher.

It's an example of inflationary psychology.

It’s the overall worry that if they don't buy right now, that they will pay more later. That fear drives people to physically cause inflation to spike faster.

Inflationary psychology could cause consumers to stock up on things now, things like non-perishable goods, with the idea being if they buy it now, they can avoid price increases down the road.

As more consumers do that, those goods become less available, which goes back to the factors of economics 101 about supply and demand.

A higher demand and a lower supply causes those prices to rise.

Daniil Manaenkov, the head of National Economic Forecasting at the University of Michigan said "personally, I'm upholded to the same level of prices and I'm not buying anything. I'm going to run my existing car into the ground until it breaks."

The psychology of buying more now to avoid price hikes, shifts inflation that would have happened in the future into the present.

"Food is expected to rise in price in the next several months, but if you were to look at agricultural commodities, so wheat, corn, soybeans, their prices are up significantly because they're storable and people are expecting them to increase in price," Manaenkov said.

One thing many people will say that is not going up are wages.

Experts believe wage growth isn't keep up with inflation so it could determine when inflation breaks as prices fall with a lower demand for goods and services.