Until recently, one of the most unpleasant things for an economist was going to a barbecue with people you didn't know. Although that is now a thing of the past due to the pandemic and social distancing, bear with me because otherwise the story won't make sense (perhaps now it happens more through WhatsApp interactions, but anyway). Whenever an uncle or friend of a friend found out what you did for a living, the immediate question would be: "Oh, man. Hey, what's going to happen with the dollar?" At first, I tried to give an educational and academic answer, but since that usually didn't satisfy the person asking the question, I decided to simply resort to arbitration: "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 didn't usually 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.

However, recently, another question, or rather a comment, has been added when discussing the new hot topic: inflation. The CPI figure for August showed a 0.4% increase compared to 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, is far from the average of the last decade and the Central Bank's target of 3%. However, you have probably 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 in price by at least 30%, meat has skyrocketed, and they can buy half as much at the supermarket and the market with the same amount of money as always, etc. Then the conspiracy theories begin, along with criticism of institutions, those who say that economists do not understand household economics, and other epithets that have nothing to do with the measurement itself, but rather with some hidden forces whose sole purpose is to subjugate ordinary 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 making things up; I actually believe that what they tell me about the prices they face is correct. The problem is that their basket is not representative of the average citizen in Chile, which is what the CPI tries to capture. This indicator is an approximation of inflation, and we have chosen it because, despite having several problems, it provides us with monthly information that is verifiable, well-known, and, above all, useful for decision-making, whether private or public policy. There are better indicators, such as the GDP deflator, but it is published with a long delay and very infrequently, 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 attempts 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 results from a welfare perspective. The best example I found has to do with the following: during the last CPI expert committee meeting, the INE published a series of graphs on alternative measurements 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 similarly to the total CPI and even to the underlying CPI. However, since then, it has been rising above the latter and, in fact, by July it had risen approximately 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 into a "healthy basket" and the rest, following the guidelines of ECLAC and MINSAL. Considering October 2019 as the starting point and up to July of this year, the healthy basket showed increases of approximately 12%, while the Food division as a whole increased by almost 9%. Thus, in order of magnitude, the variation in the healthy basket is greater than that of food, both of which are greater than the general CPI.

So, it is logical that people believe, quite rightly, that inflation is much higher. Because the things they buy every day, which are at the top of their list of things they remember and whose prices they remember most, have gone up. And they have gone up more than other things. But other items that may be more "in the shadows," but represent a similar or even greater 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 had variations below the general CPI, but they are not as present in our personal baskets. So it is not a matter of not believing, not knowing, or not empathizing with the family economy. It is simply a matter of bias.

Nathan Pincheira

Chief Economist at Fynsa