Rising prices have made people grumpy. They have depressed consumer confidence, despite a growing economy and low unemployment.
But exactly how inflation is hurting, helping and confusing people is hard to understand. Everyone knows that the cost of living has increased. Yet unless you’re constantly pulling out a calculator, you’re unlikely to know whether your wages are keeping up with inflation, whether the stock market has actually hit a real peak or whether a lottery jackpot is as sweet as the marketers claim.
There’s a fancy name for the common human failure to see past the gaudy prices largely created by inflation. This widespread inability to recognize what money is really worth is known as money illusion.
Irving Fisher, a Yale economist, wrote a book about it nearly a century ago. John Maynard Keynes, the British economist, popularized the idea. Behavioral economists have studied it extensively. But their insights tend to be forgotten when prices are fairly stable, as they were in the United States until three years ago.
When inflation increases annually at 2 percent or so, who really cares about it? You can function well without thinking about the slowly eroding value of your money — although old-timers notice it because even at a 2 percent annual inflation rate, prices double every 36 years.
But now that we’ve been living with high inflation for a while, everyone is prone to money illusion, to one extent or another.
