William Watson: Uh-oh, Democrats. It turns out Americans hate inflation

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The European Central Bank (ECB) has published a new study on how much inflation Americans want. I know: It is a funny topic for the European The central bank is supposed to investigate this. You would think it would be more interested in how much inflation the Europeans want – although the results could be politically explosive.

Be that as it may, research knows no borders – or at least it shouldn't. And one of the five economists who conducted the study works at Columbia University in New York, while another works at Brandeis University in Massachusetts. So there are clear links to America. (The other three work at the Danish National Bank, the University of York and the ECB itself.)

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In an unusually short term for scientists, the study is simply called “Inflation Preferences.” These preferences mean that Americans really don't want inflation. None of it, nada, zero. In a survey of 1,000 Americans weighted to be representative of the U.S. population, the researchers found what they describe, somewhat euphemistically, as “a notable tension between the inflation rate preferred by consumers and the one they perceive as the Federal Reserve's target.”

In fact, respondents misjudged the Fed's inflation target a little. On average, they thought it was 3.38 percent, when in reality it is 2 percent. But the medium The estimate among the 1,000 people was two percent, meaning that “a potentially well-informed consumer is close to the Fed's official target.”

No, the source of the “striking tension” between what the Fed is aiming for and what consumers want was consumers’ preference for (near) zero inflation. The mean inflation preference was Exactly Zero: we do not want No inflation!, said the respondents. Only 34.49 percent – barely a third – wanted inflation above zero. A full 23.54 percent wanted negative inflation, that is, they wanted prices to fall year after year, despite deflation's bad reputation among economists.

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What inflation rate would Americans prefer on average? Just 0.2 percent – ​​one-tenth of the official Fed target. Overall, the researchers found, 83.47 percent of respondents preferred an inflation rate lower than what the Fed is aiming for.

Of course, two percent is also the Bank of Canada's official target, and has been for longer than the Fed's. The study's findings suggest that the Bank of Canada should take a close look at Canadians' inflation preferences. After more than three decades, we may all have been convinced of the merits of a two percent inflation target. But perhaps most of us would prefer if the Bank scaled back its demands and aimed for stable prices rather than stable inflation.

Since we are in the 21st century, the ECB researchers naturally wonder whether different social groups have different inflation preferences. It found that people over 55 preferred inflation to be almost a full percentage point lower than people under 35, while those aged 35 to 54 wanted inflation to be only a quarter of a percentage point lower than younger people. Republicans and independents – with independents outnumbering Republicans – also wanted lower inflation, albeit only by a quarter to a third of a percentage point.

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People whose income came more from labor income preferred lower inflation. The same was true for homeowners – although people with mortgage loans wanted higher inflation, as debtors rationally would. If you can pay off your debts in dollars worth less than you made them, you're better off – as governments discovered soon after the debt-payment system was invented.

The demographic characteristic associated with the strongest per– Inflation preference was – another reason to cut university funding! – among people who studied economics at university. They preferred inflation by a full percentage point higher than the average respondent – ​​even though the average respondent was aiming for an inflation rate of only 0.2 percentage points, which was still below the Fed's target.

In fact, part of the study's goal was to find out whether people's level of knowledge influences their inflation preference. To do this, the researchers surveyed five additional “treatment groups” of 500 participants each on five different economic inflation theories (albeit in a much abbreviated form).

The five theories are: (Milton Friedman's) Inflation reduces the real value of cash holdings. It makes monetary policy easier when interest rates are at their “effective lower bound.” (As traditional Keynesianism argued, though not necessarily Keynes himself.) Inflation can make layoffs less likely in times of recession by reducing real wages. (This is the argument of traditional Keynesianism, though not necessarily Keynes himself.) Inflation reduces the purchasing power of workers when wages do not keep pace with inflation.) And inflation reduces the value of financial assets when their prices do not adjust promptly.

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The researchers asked the question about inflation preference again, but in a slightly different form, after each treatment group had been told the theory assigned to it. Most of the effects were not statistically significant. The two that were, both in the direction Reduction The inflation theories that people preferred were the Friedman theory about the decline in cash holdings and the traditional Keynesian argument about the decline in the real value of wages. But the impact of the economic theories, the researchers found, was small compared to the demographic and socioeconomic impacts.

But what the research makes most clear is that Americans really don't like inflation. If you're running for vice president of a president who caused 9 percent inflation in 2022 and yourself signed the cynically called “Inflation Reduction Act,” you should probably be worried about that.

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