Until some time ago, one of the most unpleasant things for an economist was to go to a barbecue with people you did not know. Even though that has been left in the past due to the pandemic and social distancing, follow me the idea because otherwise the story does not work (maybe now it is given more by interactions in WhatsApp, but well). Every time some guy or friend of a friend knew what you did for a living, the immediate question would come: "ah, mish. Hey, so what's going to happen with the dollar?". At first I tried to come up with a pedagogical and academic answer, but since that usually did not satisfy the questioner, I decided to simply opt for the arbitration resource: "if I knew what was going to happen with the dollar, I would not be here and I would live in Tuscany or the Swiss Alps because I would be rich". That usually didn't make me the most popular person at the party, but at least I wouldn't have to take that kind of question for a while.

However, in recent times, another question, more of a commentary, has been added when talking about the new hot topic: inflation. The CPI figure for August showed an increase of 0.4% over July, which was slightly above expectations. With this, in twelve months, the variation reached 4.8%, which, although it does not bring us closer to Argentina or Venezuela, it is far from the average of the last decade and the Central Bank's target of 3%. However, surely it has happened to you, or you have heard that there are people who do not believe this figure. They say that it is literally impossible for inflation to be so low, since they have seen how cars have increased at least 30%, meat has gone through the roof, at the supermarket and the fair they buy half of the things with the same money as always, etc. Then start the conspiracy theories, the criticisms to the institutions, those who say that economists do not know about family economy and other epithets that do not have to do with the measurement itself, but with some black hands whose only purpose is to subjugate the common people.

Rather than trying to convince these people that they are wrong, I think it is important to find out why they have these ideas. The truth is that they are not inventing, I do believe that what they tell me about the prices they face is correct. The problem is that their basket is not the representative basket of an average citizen in Chile, which is what the CPI tries to collect. This indicator is an approximation to inflation and we have chosen it because, despite having several problems, it allows us to have monthly information, verifiable, known and, above all, useful for decision making, whether private or public policy. There are better indicators, such as the GDP deflator, but this is published with a long delay and with very low periodicity, so it is not useful from a functional point of view.

The other thing that happens has to do with cognitive biases. There is a whole branch of economics, which is very interesting, called behavioral economics, which tries to explain why people's decisions are different from what a traditional neoclassical model predicts and how, then, we have to act to prevent these behaviors from leading to suboptimal results from a welfare point of view. The best example I found has to do with the following: during the last CPI expert committee, INE published a series of charts regarding alternative measures using subsets of the CPI basket. One of them is the "basic basket" (I think the name is self-explanatory), which until October 2019 behaved very similar to the total CPI and even to the underlying CPI. However, since that time, it has been rising above the latter and, in fact, up to July it had risen about 6% more than the overall CPI. Surely the basic basket includes prices that are much more present in people's daily lives than the total basket. Given this, inflation is perceived to be much higher. But let's go a little further. Division 1, Food and non-alcoholic beverages, can also be separated between "healthy basket" and the rest, following ECLAC and MINSAL guidelines. Considering as a starting point October 2019 and up to July of this year, the healthy basket showed increases of approximately 12%, while the Food division as a whole did so by almost 9%. Thus, in order, the variation of the healthy basket is greater than that of food, both being greater than that of the general CPI.

So, it is logical that people believe, quite rightly, that inflation is much more. Because the things they buy day by day, which are more in the first places of the things they remember and whose prices they keep more in their memory, have gone up. And they have gone up more than the rest of the things. But other things that are perhaps more "in the shadows", but that represent a similar or even higher percentage of your budget, have not gone up or have even gone down. Electricity bills, public transportation in the capital, some health services, etc., have had variations below the general CPI, but they are not so present in our personal baskets. So it is not a matter of not believing, not knowing, or not having empathy with the family economy. It is simply a matter of bias.

Nathan Pincheira

Chief Economist of Fynsa