Until not too long ago, one of the most unpleasant things for an economist was going to a barbecue with people you didn’t know. Even though that’s a thing of the past now because of the pandemic and social distancing, bear with me because otherwise this story won’t make sense (maybe it happens more on WhatsApp these days, but whatever). Every time some guy or a friend of a friend found out what you did for a living, the immediate question would come: “Oh, man. Hey, so what’s going to happen with the dollar?” At first, I tried to give an educational, academic answer, but since that generally didn’t satisfy the person asking, I decided to simply resort to a cop-out: “If I knew what was going to happen with the dollar, I wouldn’t be here—I’d be living in Tuscany or the Swiss Alps because I’d be loaded.” That usually didn’t make me the most popular person at the party, but at least I wouldn’t have to field those kinds of questions for a while.

Recently, however, another question—or rather, a comment—has been raised when discussing the latest hot topic: inflation. The CPI figure for August showed a 0.4% increase compared to July, which was slightly above expectations. As a result, the year-over-year rate reached 4.8%, which—while not bringing us anywhere near the levels seen in Argentina or Venezuela—is still well above the average for the past decade and the Central Bank’s 3% target. However, you’ve surely experienced this yourself, or heard that there are people who don’t believe this figure. They say it’s literally impossible for inflation to be that low, since they’ve seen car prices rise by at least 30%, meat prices have skyrocketed, and at the supermarket and the farmers’ market they can buy only half as much with the same amount of money as always, and so on. That’s when the conspiracy theories start, along with criticism of institutions, claims that economists don’t understand household economics, and other accusations that have nothing to do with the measurement itself, but rather with some “hidden hands” whose sole purpose is to subjugate ordinary people.

Rather than trying to convince these people that they are wrong, I think it’s important to understand the reasoning behind their ideas. The truth is that they aren’t making this up; I actually believe that what they tell me about the prices they face is correct. The problem is that their basket of goods isn’t representative of that of the average Chilean citizen, which is what the CPI aims to capture. This indicator is an approximation of inflation, and we have chosen it because—despite its various shortcomings—it provides us with monthly data that is verifiable, well-known, and, above all, useful for decision-making, whether in the private sector or in public policy. There are better indicators, such as the GDP deflator, but it is published with a significant lag and at very infrequent intervals, making it impractical from a functional standpoint.

The other issue has to do with cognitive biases. There is an entire branch of economics—a very interesting one, at that—called behavioral economics, which seeks precisely to explain why people’s decisions differ from those predicted by a traditional neoclassical model and how, therefore, we must act to prevent these behaviors from leading us to suboptimal outcomes from a welfare perspective. The best example I found relates to the following: during the most recent CPI expert committee meeting, the INE published a series of charts regarding alternative measures using subsets of the CPI basket. One of these is the “basic basket” (I think the name is self-explanatory), which, until October 2019, behaved very similarly to the total CPI and even the core CPI. However, since then, it has been rising faster than these latter indices, and in fact, by July it had increased by approximately 6% more than the overall CPI. The basic basket likely includes prices that are much more relevant to people’s daily lives than those in the total basket. Given this, inflation feels much higher. But let’s take it a step further. Division 1, Food and Non-Alcoholic Beverages, can also be broken down into the “healthy basket” and the rest, following guidelines from ECLAC and the Ministry of Public Health (MINSAL). Taking October 2019 as the starting point and looking through July of this year, the healthy basket showed increases of approximately 12%, while the Food division as a whole rose by nearly 9%. Thus, to summarize, the variation in the healthy basket is greater than that of the food division, with both being higher than that of the overall CPI.

So, it’s only natural that people believe—and quite rightly so—that inflation is much higher. Because the things they buy every day—the ones that top the list of what they remember and whose prices stick most firmly in their minds—have gone up. And they’ve gone up more than everything else. But other items—which may be more “in the background” but account for a similar or even larger percentage of their budget—have not gone up or have even gone down. Electricity bills, public transportation in the capital, some health services, etc., have seen price changes below the general CPI, but they aren’t as prominent in our personal spending baskets. So it’s not a matter of not believing, not knowing, or lacking empathy for household finances. It’s simply a matter of perception.

Nathan Pincheira

Chief Economist at Fynsa