“Inflation inequalities” may drive disparity in individuals’ wellbeing

cause and effect policy and interventions

New research suggests that inflation inequalities represent a substantial (and, often, overlooked) burden for consumer’s wellbeing.

The findings are published in a new working paper authored by Dr Alberto Prati, Research Fellow at the University of Oxford’s Wellbeing Research Centre, Associate Researcher at the LSE Centre for Economic Performance and Assistant Professor at University College London.

Dr Prati analysed data from more than 60,000 individuals in France, who were asked to assess their satisfaction with living standards as well as the change in prices over the last 12 months.

By examining the relationship between these two measures over time, and after applying some behavioral and statistical techniques to account for noise and biases, Dr Prati found that differences in self-reported perception of inflation are a robust predictor of differences in individuals’ satisfaction.

At a given point in time, a consumer reporting a one percentage-point higher inflation than another consumer endured a statistically significant satisfaction gap. This gap is even larger than the one associated with a 1% difference in income.

This effect of inflation inequality adds up to the effect of average inflation, that was first documented two decades ago by Professor Andrew Oswald, Senior Research Fellow at the Wellbeing Research Centre and a Professor of Economics and Behavioural Science at the University of Warwick.

Dr Prati also created a new dataset to study how different groups of consumers react to price changes. He found that those who were commuting by car reported higher levels of inflation and lower levels of satisfaction with living standards when the gasoline price increased.

These differences were observed even in a context of general price stability, when average inflation was particularly low.

Dr Prati said: “Until recently, this study would have not been possible. It happened thanks to the impressive work of the French Wellbeing Observatory, which has been collecting quarterly data on subjective well-being. This kind of surveys open the door to new research and help understand the determinants of the well-being distribution.”

The full working paper ‘The well-being cost of inflation inequalities’ is published by the London School of Economics’ Centre for Economic Performance. As a pre-print discussion paper it has not yet been subject to formal peer review.

Read a blog post from Dr Prati on inflation inequalities and their impact on individual wellbeing on the LSE website here.