The Price Is Wrong: Why Inflation Feels Way Worse Than It Is (And Sometimes Way Better)

Episode Description: Inflation is a number. But it doesn't feel like a number — it feels like a personal attack. Why does a 4% inflation rate feel like the economy is collapsing while a 6% raise feels like barely enough? Why do we notice when gas goes up 30 cents but completely ignore when airfare quietly drops? Why does everyone seem to have a wildly different gut sense of how expensive things have gotten? In this episode, we go deep on the psychology of perceived inflation — the gap between what the CPI says and what your nervous system believes. This one will change how you read financial news, fight about money, and make spending decisions forever.

What You'll Learn:

• Why our personal "felt inflation" is almost always higher than measured inflation
• The specific cognitive biases that distort how we perceive price changes
• Why losses feel bigger than equivalent gains (and what this does to price perception)
• How the media, social comparison, and memory all conspire to make inflation feel worse
• Practical frameworks for recalibrating your inflation perception and making smarter financial decisions

Key Concepts Mentioned:

• Loss aversion (Kahneman & Tversky)
• Availability heuristic
• Salience bias
• Money illusion
• Hedonic adaptation (in reverse — "hedonic de-adaptation")
• Anchoring and price memory
• The CPI methodology and its known limitations
• Shrinkflation

Resources:

• Thinking, Fast and Slow by Daniel Kahneman
• The Deficit Myth by Stephanie Kelton (for macro context)
• Dollars and Sense by Dan Ariely & Jeff Kreisler
• Kahneman & Tversky (1979), "Prospect Theory: An Analysis of Decision Under Risk" — Econometrica
• Bureau of Labor Statistics CPI explainer: bls.gov/cpi
• Isabella Weber's work on "sellers' inflation" and price-setting behavior

Transcript

Intro: The Gas Station Problem

What Inflation Actually Is (and What the CPI Is Really Measuring)

Why Felt Inflation ≠ Measured Inflation

What To Do About It: 5 Recalibration Tools

Recap and Challenge of the Week

SPEAKER_00 0:05

Hi everyone, welcome to Personal Finance with Molly, where we talk about all things personal finance. I am your host, Molly Ford Coates. Let's dig in. Hey friends, welcome back. So picture this. You're at the gas station. You pull up, you glance at the price per gallon, and something in your chest just tightens. You remember clearly and vividly when gas was cheaper, and maybe a whole lot cheaper. Even if it's only 35 cents more per gallon, even if we're talking about a difference of like maybe six dollars for a full tank, your day is slightly worse. You are annoyed. You might even post about it. Now, same week, different scenario. You're booking a flight, you click around, you find a fare that seems reasonable, and you book it without much thought. You don't know that six months ago that exact route was$40 cheaper. You don't know, so you don't feel it. Life proceeds normally. Same amount of money, radically different emotional experience. That gap, that gap between what prices are doing and what prices feel like they're doing, is what this whole episode is about. And it has enormous implications for your financial decisions, your financial stress levels, and honestly for how you interpret basically everything you read about the economy. Let's dig in. First, friends, let's make sure we're on the same page about what inflation actually is. Because the word gets thrown a lot around a lot, and I think it's worth spending two minutes on the mechanics before we talk about the psychology. So, inflation literally is more money in the economy, more money being pumped into the economy, more money is chasing the same amount of goods, so the prices rise. Inflation causes an increase in prices. It is not the increase in price itself. The most common measure in the United States is the Consumer Price Index, or CPI, which is calculated by the Bureau of Labor Statistics, the BLS, by tracking the prices of a basket of goods and services that a typical American household buys, things like housing or food or transportation and medical care, clothing, recreation. Now, here's what's important. The CPI is a weighted average across a huge range of categories. Housing costs are weighted heavily because they represent a large share of most people's spending. Apparel is weighted lightly. Energy sits somewhere in the middle. When you hear inflation is 3.5%, what that means is across the entire basket of goods, prices on average went up 3.5% over the past year. Some things went up more, some things went up less, some things actually went down. The number is a composite. And here is the first crack in the floor between measured inflation and felt inflation. Friends, you don't buy the average basket. You buy your basket. If you're a renter in a city with a hot housing market, your personal inflation rate might be 8%. If you own your home outright and mostly spend on electronics and travel, both of which have been deflationary categories for years, your personal inflation rate might be 1%. The CPI is nobody's personal experience. It's a statistical aggregate. So, right off the bat, before we even get into the psychology, there's a structural reason why the number you hear on the news doesn't match what you feel at the checkout line. Your life is not the average. But here's the thing: even when people's actual inflation rate matches or is below the measured rate, they still tend to feel like inflation is worse than it is. And that's where the behavioral finance stuff gets really interesting. Let me walk you through the main culprits. I have five for you. And please, friends, I am not saying inflation isn't real. It is very real. And it can be very painful, but I'll talk more about that in a few. Okay, five culprits. Culprit one, loss aversion. If you've listened to the show for a while or read about personal or about behavioral economics, you've heard of loss aversion. I tend to talk about it quite frequently on this podcast. It's one of the foundational findings of Kahneman and Traversky's prospect theory, the work that eventually won Kahneman the Nobel Prize in Economics. The core finding of loss aversion is this: losses feel roughly twice as painful as equivalent gains feel good. Losing$100 hurts about twice as much as finding$100 feels good. That's not rational, but it is deeply, universally human. Now apply this to prices. When a price goes up, that's a loss. You're paying more for the same thing. You had X dollars, now you have fewer of them. Your brain registers this with the full emotional weight of a loss. When prices go down, that's a gain. You have more money than you would have. But gains are processed with roughly half the emotional intensity of losses. So even if prices in your life are going up and down in equal amounts, your overall emotional experience is negative. The ups sting twice as hard as the downs feel good. You are neurologically guaranteed to feel like things are getting more expensive even in a neutral price environment. This is why people consistently overestimate inflation in surveys. Not because they're wrong about the specific prices they remember, but because their emotional experience of price increases is weighted by loss aversion in a way that makes the aggregate feel worse than the data shows. Okay, culprit two, salience bias. Here's the gas station problem in full behavioral detail. Salience bias is our tendency to place excessive weight on information that is vivid and visible and frequent. And certain prices are extremely salient in our daily lives while others are almost invisible. Like gas prices. Enormously salient, right, friends? Giant numbers on a sign you drive past regularly. You see the price before you buy. You watch the total tick up as you fill the tank. It is impossible to purchase gas without being confronted with the price in a very visceral way. Grocery staples, another one, like bread, eggs, or milk, similar similarly salient. You buy them often. You've bought them for years. You know roughly what they cost. A 30 cent increase in a dozen eggs is noticed and remembered. But the price of your internet service? Well, that could be invisible. It's auto-debited, you've stopped looking at the bill, and unless you deliberately check, you have no idea if it's gone up$8 since you signed up. Or the price of your insurance premium? Slowly climbing in ways you barely register. Streaming subscriptions? You checked the price when you signed up, but maybe you haven't thought about it since. The prices we notice going up are a biased sample of all the price changes happening in our lives. We're disproportionately watching the gas station sign and underweighting all the invisible auto payments quietly increasing in the background. And friends, there's also a category asymmetry here. The goods that have gotten less expensive over the last few decades, like electronics, like I said before, electronics, clothing, some foods, these are often categories where prices are either invisible or where the price decreases feel like just that's the way things are. You don't drive past a sign announcing that laptops are 40% cheaper than they were in 2015. You just buy a laptop and move on. Now, let's talk about memory because this is a big one. Culprit three: anchoring and the ghost of prices past. Anchoring is the cognitive bias where we rely too heavily on the first piece of information we encounter. Or in this case, the price we first remember when making judgments. We all have price anchors for things we buy regularly. Your anchor for a cup of coffee might be what you paid for it in 2015. Your anchor for a movie ticket might be from your teenage years. Hello, I am very guilty of that one. Your anchor for a starter home might be what your parents paid in a completely different economic era. These anchors are emotionally powerful and extremely difficult to override with current data. When current prices deviate significantly from your anchor, it triggers a strong sense of wrongness. This feels like an outrage, even if economists could explain exactly why current prices make sense relative to wages and productivity and monetary supply. Also, friends, this is part of why older generations tend to report feeling inflation more acutely. Not necessarily because they're experiencing more inflation, but because their price anchors are older and more distant from current prices. The gap between the anchor and reality is larger. The feeling of wrongness, well, that's more intense. And here's a wild one. The psychological phenomenon called money illusion. Money illusion. This is when people think about economic values in nominal terms, actual dollar amounts, rather than real terms adjusted for inflation. So someone getting a 2% raise in a 4% inflation environment is objectively getting a pay cut, but it feels like a raise because the number got bigger. Meanwhile, someone getting a 0% raise in a 0% inflation environment has the same purchasing power, but it feels worse because the number didn't move. The number in your paycheck is the anchor. Anything that makes it go up feels good. Anything that makes it go down feels bad. The purchasing power underneath the number barely registers emotionally. So I want to pause here and address something because I don't want this episode to come across as, well, inflation is just a vibe and you should stop complaining. That is absolutely not what I'm saying. Inflation is real. I'm coming back to this. Inflation is real. Price increases are real. And for many people, particularly lower income households who spend a higher proportion of their income on necessities like food and rent and transportation. Well, inflation genuinely is more painful than the CPI suggests. Those categories have often outpaced overall inflation. And for people without that financial cushion, there's no flexibility to adjust. What I am saying, friends, what I am saying is that there is a consistent gap between the mathematical reality of inflation and the emotional experience of inflation. And that gap is driven by well-documented cognitive biases. Understanding that gap doesn't dismiss the real pain of price increases. It helps you think more clearly about your own financial situation and make better decisions despite the emotional noise. Those are very different things. And I think that distinction matters. Alright, two more culprits. These ones are about the world around you, not just your brain. Culprit 4. Media. The media and social comparison. The availability heuristic, another Kahneman classic, says that we judge the probability and severity of things based on how easily examples come to mind. And examples come to mind more easily when they're emotionally vivid and recent and repeatedly covered. Guess what gets repeatedly covered in financial media? Price increases. Specifically dramatic ones. Egg prices up 40%. Rent in such and such a city hits all-time high. The most expensive Thanksgiving turkey ever. These are legible, relatable, emotionally resonant stories. Price decreases don't get the same coverage because electronics are cheaper than ever is not really a headline that makes anyone click or worry. This creates a systematically distorted information environment. If your main input about prices is financial news and social media, you are consuming a highlight reel of the worst price increases and almost none of the categories where prices are stable or falling. Your mental model of inflation is going to be, well, inflated. Social comparison compounds this. When your friends and family talk about prices, like at dinner or in text messages or on Instagram, they're mostly sharing moments of sticker shock. Well, can you believe what they charge for parking now? Nobody is going out of their way to mention that the car insurance they got last year ended up being cheaper than expected. Negativity is more conversationally interesting. Price pain is more shareable. So not only is your brain biased toward remembering price increases, but your social and media environment is systematically feeding you a biased sample of price information. And culprit 5. Okay, this one is real and it deserves its own moment because it's not purely psychological. It's companies actively exploiting our cognitive biases. Shrinkflation is when companies reduce the quantity of a product while keeping the price the same, or even raising it but slightly. The 16 ounce container of ice cream that quietly becomes 14 ounces? Or that bag of chips that's now 10% air? Or the roll of paper towels with slightly fewer sheets. Why do companies do this instead of just raising the price? Because, friends, they know they know that we're more sensitive to visible price changes than to quantity changes. Our price anchors are strong. Our quantity awareness, well, that's usually weak. A 15% price increase feels like a violation, but a 15% quantity reduction is usually noticed weeks later. Well, if ever. This is companies doing applied behavioral economics to protect their margins. And it's effectively a hidden inflation tax that doesn't show up clearly in your felt experience until the day you notice the ice cream container has shrunk and something in you snaps. Shrinkflation is genuinely worth tracking. There are consumer watchdog sites that document it, and it's worth noting, it's worth doing a quick review of your regular grocery purchases every year to see if you're quietly getting less for your money. So here's the big question: What do you actually do with all of this? Because, friends, as you know, I don't want you to walk away just feeling like your brain is broken and marketers are evil and that the media is lying to you. All of those things contain some truth, but the more useful takeaway is this. Here are concrete ways to recalibrate your relationship with inflation. So tool one, recalibration tool one. Track your actual personal inflation rate. This sounds tedious, but it doesn't have to be. Pick your five or ten biggest spending categories. Look at what you paid for them a year ago versus now. Calculate the change. I promise you this number is going to be different from what you think. Sometimes better, sometimes worse, but almost always more nuanced. Knowing your actual personal inflation rate is vastly more useful than reacting emotionally to some national average. Here's tool two, recalibration cool tool two. Audit your invisible expenses. Once a year, pull up your bank statements and go through every auto payment and subscription. Not to cancel them necessarily, just to look. How many of them have quietly increased? How many have you not thought about since you signed up? The salience bias means you've been ignoring these while stressing about gas prices. Redirect some of that attention. Recalibration tool three. Adjust for wages, not just prices. Here's the most underused frame in personal inflation discussions. Real wages. The question isn't just are prices higher than they were. It's are prices higher than they were relative to what I earn. If your salary has grown faster than your personal inflation rate, you are in real terms better off, even if the raw numbers feel worse. This is not always the case, though, but it's often more true than people feel it is, because we're subject to money illusion on the wage side, too. Tool four, notice your anchors. When you have a strong emotional reaction to a price, that sense of outrage or wrongness, just pause and ask, what is this reaction based on? When did I act last actually look at this price? Is my anchor from five years ago or ten years ago, or someone else's experience in a different city or era? Your anchor might just be stale. That doesn't mean the current price is right, but it does mean your emotional reaction is partially noise, not signal. Tool five, recalibration tool five. Separate inflation stress from inflation decisions. And this may be the most important one. Feeling stressed and anxious about prices is not the same as making good financial decisions in response to prices. In fact, chronic inflation anxiety tends to produce worse decisions like panic buying or hoarding or making major financial moves based on fear rather than analysis. Acknowledge the feeling, give it a moment, and then ask, what does the actual data say? What does my actual financial picture look like? What decision specifically does this require of me? Stress is information, but it is not instructions. All right, friends, let me leave you with this. The gap between measured inflation and felt inflation is not a sign that you're irrational or financially illiterate. It's a sign that you're human. The loss aversion, the salience bias, the anchoring, the availability heuristic, these are features of human cognition, not bugs. They served real purposes for a very long time. But but friends, we live in an information-rich, financially complex environment that our brains did not evolve for. Gas station signs and Twitter rants and cable news price panic were not part of the ancestral landscape. And so we have to do a bit of conscious work to make sure the emotional experience of inflation isn't running our decisions. The economy is noisy. Your nervous system is easily triggered by that noise. Your job is to be the filter, not to suppress the feelings, but to make sure the data underneath them is actually reliable before you act on them. So here's your challenge this week. I want you, friends, I want you to think about one financial belief that you hold strongly, something you feel viscerally about, prices or affordability, and I want you to spend 15 minutes finding the actual data on it. Not to prove yourself wrong, just to see if the feeling and the data are pointing in the same direction. And sometimes they are, and some t sometimes they're wildly divergent. Either way, you'll be operating with better information. You got this, friends. Hey friends, thanks for listening to Personal Finance with Molly. Thank you for being here for another episode. If this episode made you think differently about inflation or some parts of inflation, please send it to someone who loves complaining about prices. It may be a great conversation starter. And if this podcast resonates with you, all about where your money, your mindset, and your behavior, Intersect, please follow the show, leave a review, send me a text message, there's a link in the show notes. It genuinely helps more people find the show. Until next time, friends,