The widespread inability to recognise what money is really worth is known as money illusion.
Rising prices have made people grumpy. They have depressed consumer confidence, despite a growing economy and low unemployment.
When inflation increases annually at 2 per cent or so, who really cares about it? You can function well without thinking about the slowly eroding value of your money – although old-timers notice it because even at a 2 per cent annual inflation rate, prices double every 36 years. As a result of all this, a range of consumer credit rates steepened. These include mortgages, credit cards and personal loans.
They used what economists call nominal prices, not real ones. On an inflation-adjusted basis, the stock market only in March approached a new peak for the first time in years. I relied on an analysis by Dr Robert Shiller, a Yale economist who has long used inflation-adjusted data to pierce the veil of money illusion. Because of setbacks in the past few weeks – high inflation and a faltering stock market – the market has fallen below peak levels in real terms.
When used by skilled marketers, money illusion can make unwary humans so excited that they will pour hard-earned money into chimeras, like lotteries and frothy stock markets.
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