SMOKERS' CORNER: THE CURSE OF INFLATION PSYCHOLOGY.

Last week, a TV news channel 'broke the news' that the price of petrol was going to witness a further increase after 12am that night. Within minutes, petrol stations were stormed by owners of all kinds of vehicles, wanting to get fuel at existing rates that were supposed to be increased the next day.

No such increase was announced by the government. It was 'fake news'. But, of course, the manner in which petrol prices have been rising recently, the so-called 'breaking news' was instantly lapped up. The question is, even if the news about the petrol price increase were true, getting one's tank full at old rates doesn't mean the fuel would last longer.

Economists call this 'inflation psychology.' This is when consumers develop a state of mind which makes them spend money a lot more than they would otherwise. It is largely an irrational act triggered by the fear that prices are rising. But to them, it's a rational act because they are convinced they can save money by buying a product today whose price is 'sure to increase' tomorrow.

Inflation psychology can become a self-fulfilling prophecy. An increase in consumer spending means less savings, and the speed with which money exchanges hands, swells inflation. According to the French economist Pascal Blanque, 'narratives play a role in spreading inflation exponentially, like a virus, turning it into a mass phenomenon with feedback loops.'

Consumers spending above normal believing that prices will continue to rise, can become a self-fulfilling prophecy. But countering this psychology requires tough decisions, even if they impact short-term electoral interests

Consumer fears, speculations, and 'predictions' proliferated by the media lead to the development of inflation psychology which, as mentioned, worsens inflation. According to the American economist Ben S. Bernanke, governments allow inflation to fester fearing a recession (when incomes and spending decline). This makes the consumer believe that inflation is here to stay, triggering frenzied spending which, in turn, leads to constant price increases.

This is exactly what happened in the 1970s in various countries. Bernanke calls that era 'The Great Inflation'. According to him, unprecedented government spending on public welfare projects since the four-term presidency of US President F.D. Roosevelt (1933-44), and the opening of easy lines of credit without increasing taxes (for political reasons), led to deficit spending, creating...