Tony Crescenzi
Aside from the powerful effects of wages, some of the disconnect between the way that people perceive inflation and the way it is being reported could reflect the notion that people are seeing inflation only where there is inflation.
This was the subject of a well-written New York Times article recently. People tend to have what is known in psychology as a "loss aversion," meaning that they are much more sensitive to losses than to gains of equal size. For example, when the price of cars, televisions, computers, lodging and recreation tend to decline, as they did in April, people tend to overlook that and focus instead on where they are experiencing losses, such as at the gas pump and in the grocery stores. People treat gains and losses in their investments in a similar way. In the U.S. financial markets, which are dominated by New Yorkers, the idea that inflation is understated is actually true for these city dwellers, since prices in New York tend to rise more than in the nation as a whole. I do not profess to believe that the loss-aversion theory it the best explanation for the disconnect, but it definitely has credence.
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