The Accuracy of Consumers' Perception of Future Inflationary Price Changes

Four laboratory experiments were conducted to investigate the extent to which and how consumers encountering inflationary increases in product prices are able to accurately extrapolate future price increases. Between 32 and 48 undergraduates participated in the different experiments. In Experiment 1 it was found that participants were more able to extrapolate a proportional increase when presented with two consecutive proportional price increases compared to one price increase. This finding was not replicated for decreasing prices in Experiment 2. Experiment 3 showed that varying the time interval between prices counteracted an accurate extrapolation of proportional price increases despite that two price increases were presented. In Experiment 4 it was found that presenting the same (vs. different) proportional price increases for two products made participants able to extrapolate the common proportional price increase.