The Psychology Of Inflation: What Makes You Say, “No Way Am I Paying That”?

Authored by Charles Hugh Smith via OfTwoMinds blog,

Value varies. Invest in what’s valuable.

It’s a well-recognized human bias to feel losses more acutely than gains. Perhaps something similar occurs with inflation. As essentials soar in cost–i.e. non-discretionary expenses such as shelter, food at home, utilities, childcare, healthcare insurance, etc.–our only response is sighing resignation: yes, it’s a ripoff but there’s little we can do about it without making major changes in our lives.

Discretionary purchases are a different matter. The pleasures gained by the purchase are significant enough to be worth the financial cost. But at some point–a point that varies with each individual–the cost is so high that the pain of that expense outweighs the pleasure of the purchase.

This may explain why the public mood is sour despite the rosy statistics of economic expansion. The experiential gains of abstract economic stability do not outweigh the acute pain caused by soaring costs for pleasures that were far more affordable just a few short years ago.

Put another way: economically speaking, what is unseen statistically may have more impact that what is seen. So GDP is rising, blah-blah-blah, but can you believe I just paid $56 for a nothing-special breakfast for two people?

You see and hear these experiential leverage points all the time now: if you take a moment to observe the shoppers in the meat aisle, you see many lookie-loos: people go to the “sale” cooler for steaks, look at the price, shake their heads and walk to the discount bin to paw through what little is left.

Or you hear another shopper mutter, “I’m not paying that!” after glancing at the price.

Even well-off retirees are appalled when a fast-food meal that a few years ago would have been covered by a $20 bill now requires a $20 and a $10.

Millions of households have canceled cable TV service due to the soaring costs and marginal quality of the offerings. “Basic cable” that provided low-cost access to local channels has vanished, replaced by a “basic premium (of course) service” that costs four times more.

As long as the credit card had plenty of spending power, people didn’t seem to feel any pain as costs soared. $400 per day for a nothing-special room in a nothing-special resort, no problem. $100 to change the oil in the car, no problem. And so on.

But once the funds available for discretionary spending dry up, sensitivity to financial pain increases.

But just as consequential as availability of discretionary funding is the internal measure of value. The well-off retiree can easily afford the fast-food meal, but the pain exceeds the pleasure because the meal simply isn’t worth the price.

The perception of value varies significantly. Time, place and individuals all vary. What seems costly in one circumstance may offer high value to someone else. But if we plot all these unseen data points, we sense a change in the tide: a great many discretionary purchases are no longer worth the cost.

Conservative pundit David Brooks recently illustrated these nuances by expressing his discontent with a $78 tab for a meal at an airport restaurant. His online post suggested that his $78 bill for a hamburger meal was an example of why Americans were discontented with the economy.

It was soon revealed that the burger meal was $18 and the balance was comprised of three whiskeys at $20 each. Mr. Brooks apparently felt the price of the three whiskeys exceeded the value of the three whiskeys, but one wonders why he ordered whiskeys two and three if he was so disenchanted with the price of the first one.

This introduces two other psychological factors in inflation: sudden price increases catch our attention, and so they are more likely to trigger an experiential leverage point. The same can be said of serial increases in the cost of services that were previously stable: when the cable TV or utility bill rises inexorably month after month, we notice this and begin considering actions to reduce or eliminate this expense.

The other factor is we like to whine, as if low prices are an entitlement and we’ve somehow been robbed of something we’re entitled to. But value is conditional and contingent. In some cases, we simply can no longer afford the service or product. In other cases, the value has diminished as the cost has risen, or the cost has risen to the point it far exceeds the value.

Having lived on the margins most of my life, frugality was not an option, it was a pressing necessity. It is now a habit and a free-standing value independent of how much money I earn or have. So paying $100 to have the oil in my Civic changed is off the table. We change the oil ourselves, just as we’ve done for decades.

Acute sensitivity to value and price has its rewards. When we do splurge, we do it not out of habit but to reap the gains of some purchase that is well worth the monetary price.

Unlike jetsetters like Mr. Brooks, I can count the number of meals I’ve bought in airports on one hand, and several of those were voucher meals due to delayed flights. Earlier this year, I had a highly enjoyable airport restaurant meal that was worth a great deal more than the price. It was late, and there was only one restaurant still open. It was crowded, and I felt fortunate to get a table. I’d just left my wife in the post-surgery recovery ward of the hospital, grateful she was OK, and I was drained by a very long day of uncertainties.

The hamburger meal and draft beer cost $35. That was a splurge for me but memorably valuable in that time and circumstance. I was grateful to have something to eat, grateful to the overworked servers and for everything good that had happened that day. I remembered my own job serving the public, and how much a decent tip meant. 50 years later, I still recall the rare decent tips. I handed the server a $20 tip, it wasn’t much, but it expressed “thank you.”

Value varies. Invest in what’s valuable.

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