Forum for Science, Industry and Business

Sponsored by:     3M 
Search our Site:

 

K-State research shows consumers can predict inflation as well as professional economists

27.08.2008
When it comes to predicting the rate of inflation, professional economists might tell consumers, "Your guess is as good as mine."

Research by a Kansas State University professor shows that household surveys predict the inflation rate fairly accurately and as well as professional economists.

The pros employ statistics like the unemployment rate, money supply growth and exchange rate changes. Consumers participating in surveys are more likely to think about how much they spent at the grocery store that week.

"Surprisingly, the median household is just as good as the average professional economist," said Lloyd B. Thomas, head of the department of economics at K-State, where he has been a faculty member since 1968. "I'm a little surprised because economists are using sophisticated models. But the consumers know what's happening with milk prices."

Thomas and Alan P. Grant of Baker University in Baldwin City published a study in the June issue of The Economic Record. They looked at the accuracy of an inflation survey of U.S. consumers versus a survey of Australians. Thomas said the U.S. survey was slightly more accurate, but that could be because the U.S. survey -- which the University of Michigan conducts each month by telephone with 500 households -- more accurately probed consumers' hunches about inflation.

Both surveys, however, showed that consumers have a good idea about where inflation is headed. On average, they're off by 1.3 percentage points. And although they don't get it exactly right, Thomas said they weren't biased. That is, consumers don't consistently underestimate or overestimate inflation.

"It means economists need to improve their forecasting -- or at least be a little humble," Thomas said.

Inflation forecasts matter because they influence many areas of the economy, from wage negotiations and the interest rate, to how businesses set their prices. High inflation can mean businesses spend less on research and development, fewer investors are willing to consider government bonds, and people behave inefficiently, Thomas said. As examples, he said unions spend time and money renegotiating more frequently, and governments and businesses are forced to issue short-term bonds as buyers shy away from long-term bonds.

On a personal level, Thomas said inflation expectations can determine whether people buy houses or how they manage their nest egg.

"Inflation expectations are one of the most important factors in the economic environment," Thomas said.

He said persistent inflation didn't take hold in the United States until after World War II. Before that, a loaf of bread cost about the same in 1940 as it did in 1776. Commitment of government to prosperity and Federal Reserve activism have meant that the price level in the U.S. increased in 59 of the past 60 years. In the 1970s, inflation increased on average 8 percent per year, Thomas said.

In the past year, Thomas said rising food and gas prices have pushed inflation above 5 percent. He said the Federal Reserve would normally need to raise interest rates to slow down spending and inflation. But chairman Ben Bernake and others on the Federal Reserve Board are fearful of a recession.

"Consumers make up 70 percent of total spending," Thomas said. "So if consumers lose confidence, that could bring us into a bad economic situation."

As long-term inflation hedges, Thomas said it is wise to consider investments in the stock market and real estate.

"When there's rising inflation, it's beneficial to be in debt to purchase real assets, because you'll pay your debt back with money that won't be worth as much in the future," Thomas said.

Whereas high inflation helps those who hold real estate and other real assets, it hurts people with bonds. This often includes people with retirement accounts.

"With high inflation, you want to avoid bonds like the plague," Thomas said.

Lloyd B. Thomas | EurekAlert!
Further information:
http://www.k-state.edu

More articles from Studies and Analyses:

nachricht The importance of biodiversity in forests could increase due to climate change
17.11.2017 | Deutsches Zentrum für integrative Biodiversitätsforschung (iDiv) Halle-Jena-Leipzig

nachricht Win-win strategies for climate and food security
02.10.2017 | International Institute for Applied Systems Analysis (IIASA)

All articles from Studies and Analyses >>>

The most recent press releases about innovation >>>

Die letzten 5 Focus-News des innovations-reports im Überblick:

Im Focus: Nanoparticles help with malaria diagnosis – new rapid test in development

The WHO reports an estimated 429,000 malaria deaths each year. The disease mostly affects tropical and subtropical regions and in particular the African continent. The Fraunhofer Institute for Silicate Research ISC teamed up with the Fraunhofer Institute for Molecular Biology and Applied Ecology IME and the Institute of Tropical Medicine at the University of Tübingen for a new test method to detect malaria parasites in blood. The idea of the research project “NanoFRET” is to develop a highly sensitive and reliable rapid diagnostic test so that patient treatment can begin as early as possible.

Malaria is caused by parasites transmitted by mosquito bite. The most dangerous form of malaria is malaria tropica. Left untreated, it is fatal in most cases....

Im Focus: A “cosmic snake” reveals the structure of remote galaxies

The formation of stars in distant galaxies is still largely unexplored. For the first time, astron-omers at the University of Geneva have now been able to closely observe a star system six billion light-years away. In doing so, they are confirming earlier simulations made by the University of Zurich. One special effect is made possible by the multiple reflections of images that run through the cosmos like a snake.

Today, astronomers have a pretty accurate idea of how stars were formed in the recent cosmic past. But do these laws also apply to older galaxies? For around a...

Im Focus: Visual intelligence is not the same as IQ

Just because someone is smart and well-motivated doesn't mean he or she can learn the visual skills needed to excel at tasks like matching fingerprints, interpreting medical X-rays, keeping track of aircraft on radar displays or forensic face matching.

That is the implication of a new study which shows for the first time that there is a broad range of differences in people's visual ability and that these...

Im Focus: Novel Nano-CT device creates high-resolution 3D-X-rays of tiny velvet worm legs

Computer Tomography (CT) is a standard procedure in hospitals, but so far, the technology has not been suitable for imaging extremely small objects. In PNAS, a team from the Technical University of Munich (TUM) describes a Nano-CT device that creates three-dimensional x-ray images at resolutions up to 100 nanometers. The first test application: Together with colleagues from the University of Kassel and Helmholtz-Zentrum Geesthacht the researchers analyzed the locomotory system of a velvet worm.

During a CT analysis, the object under investigation is x-rayed and a detector measures the respective amount of radiation absorbed from various angles....

Im Focus: Researchers Develop Data Bus for Quantum Computer

The quantum world is fragile; error correction codes are needed to protect the information stored in a quantum object from the deteriorating effects of noise. Quantum physicists in Innsbruck have developed a protocol to pass quantum information between differently encoded building blocks of a future quantum computer, such as processors and memories. Scientists may use this protocol in the future to build a data bus for quantum computers. The researchers have published their work in the journal Nature Communications.

Future quantum computers will be able to solve problems where conventional computers fail today. We are still far away from any large-scale implementation,...

All Focus news of the innovation-report >>>

Anzeige

Anzeige

Event News

Ecology Across Borders: International conference brings together 1,500 ecologists

15.11.2017 | Event News

Road into laboratory: Users discuss biaxial fatigue-testing for car and truck wheel

15.11.2017 | Event News

#Berlin5GWeek: The right network for Industry 4.0

30.10.2017 | Event News

 
Latest News

Corporate coworking as a driver of innovation

22.11.2017 | Business and Finance

PPPL scientists deliver new high-resolution diagnostic to national laser facility

22.11.2017 | Physics and Astronomy

Quantum optics allows us to abandon expensive lasers in spectroscopy

22.11.2017 | Physics and Astronomy

VideoLinks
B2B-VideoLinks
More VideoLinks >>>