Latest / Inflation Explained with Fexingo: CPI, Prices, and the Cost of Living for Everyday People / Why Your Buying Habits Are Trapped by Inflation Psychology
Transcript
- Lucas: So inflation is down — June CPI came in at 3.5 percent annual, lower than expected, energy prices easing. But I’m willing to bet that when you open your banking app this morning, it doesn’t feel like a victory lap. Luna: It absolutely does not. My grocery bill hasn’t gotten the memo. Neither has my rent. And I’m not alone — every time I mention inflation cooling to friends, they look at me like I’m speaking another language. Lucas: That gap — between what the data says and what people feel — is exactly what I want to dig into today. It’s not just anecdotal. There’s a real behavioural economics mechanism at play, and a 2026 study from the University of Chicago Booth School just put some numbers on it. Luna: If walking through the economy with us has made something click — maybe you’ve started noticing shrinkflation, or you finally understand why core CPI strips out food and energy — a couple of dollars a month genuinely keeps these shows ad-free and independent. Lucas: Yeah, it’s at buy me a coffee dot com slash fexingo. No pressure, but listener support is what lets us spend time on angles like this instead of chasing headlines. Luna: Totally. And it really does add up. So back to that study — what did they find? Lucas: The study is about what economists call 'anchoring.' Basically, once a price goes up — say your streaming subscription jumps from $12 to $15 — your brain treats that $15 as the new normal. When the price eventually drops back to $14, you don't feel relief. You feel like you're still paying more than you should. Luna: Because the anchor was $12, not $15. So even a drop doesn't reset you to the old reference point. Lucas: Exactly. And the study found that for everyday purchases — groceries, rent, subscriptions — this anchoring effect can persist for up to 18 months after a price change. So even though CPI has been trending down since late 2025, most consumers are still anchored to the peak prices from mid-2024. Luna: Wait, so it's not just that we remember prices — we're literally making spending decisions based on outdated anchors? Lucas: That's the mechanism. The researchers ran a controlled experiment where they showed people historical price trajectories for common goods. Those who saw a price spike followed by a moderate decline still reported feeling 'overcharged' when the current price was above the original anchor. And they were less likely to increase consumption even when the price fell. Luna: So that explains why people are still complaining about inflation even though CPI is at 3.5 percent — their internal price memory is stuck at the peak, not the trend. Lucas: Right. And this isn't just a psychological curiosity. It has real economic consequences. If consumers are anchored to old high prices, they might delay spending on things like dining out or travel — which slows the recovery in sectors that rely on discretionary spending. Luna: Which in turn keeps inflation lower, because demand stays muted. It's almost a self-perpetuating cycle. Lucas: Exactly. And the study quantifies it: they estimate that persistent anchoring reduced consumer spending growth by about 0.8 percentage points in the first half of 2026. That's not trivial. Luna: So where are the strongest anchors right now? I mean, we know rent is a big one — the CPI shelter index still shows it rising, but at a slower pace. But people's rent went up $200 in 2024 and has barely come down. Lucas: Rent is the classic example because it's a large, infrequent transaction. The study found that for rent, the anchoring effect is especially strong — because you don't renegotiate every month, the last signed price becomes a powerful reference. And with the national median rent still about 12 percent above 2023 levels, even if new leases are flat, tenants feel trapped. Luna: And groceries — those are weekly, so you'd think we'd adjust faster. But the study says the opposite for frequently purchased items: because you see the price every time, the anchor gets reinforced. If milk went from $3 to $4.50 and then down to $4, you still see $4 as 'expensive' because you've internalised $3 as normal. Lucas: That's a key nuance. High-frequency purchases actually strengthen the anchor because you're reminded of the peak price every time you buy. The researchers call it 'repetition anchoring.' The more often you see the inflated price, the harder it is to accept a lower one as a good deal. Luna: So what about subscriptions? Those are monthly auto-payments — we're almost numb to them. Lucas: Subscriptions are a different beast. The study found that automatic payments reduce 'price salience' — you don't actively evaluate the value each month. So anchoring is weaker there. But the flip side is that you're less likely to cancel even when the price goes up, because you're not consciously processing the anchor shift. Luna: Interesting — so for subscriptions, the inertia works in the company's favour. For groceries, the anchoring works against the consumer's perception of value. Lucas: Exactly. And this is where the policy angle comes in. The Fed pays close attention to inflation expectations — surveys like the University of Michigan's consumer sentiment index. Those expectations are partly driven by anchoring. If consumers persistently feel prices are too high, they may demand higher wages, which can fuel actual inflation. Luna: So the Fed has an incentive to try to 'unanchor' consumers — to reset expectations. But how do you do that? Run ads saying 'Hey, prices have stabilized'? Doesn't seem like it would work. Lucas: The study suggests that transparency about price history could help. When researchers showed consumers a chart of the full price trajectory — peak and decline — their anchoring effect weakened. They realised the price had actually come down, even if it wasn't back to the original low. So maybe more retailers or apps could show historical price trends, like how Amazon sometimes shows 'lowest price in 30 days'. Luna: That's actually a practical takeaway. I know apps like CamelCamelCamel do that for Amazon, but for groceries or rent, it's harder to get that data. Lucas: There's a startup angle there — someone could build a 'price history dashboard' for your regular purchases. But beyond apps, there's a broader implication: the inflation narrative in the media matters. If every headline screams 'inflation eases' but your personal anchor says 'still high,' the narrative doesn't land. The study recommends more context — like comparing current prices to both the peak and the pre-pandemic trend. Luna: Let's bring this back to the CPI data we saw this week. June CPI at 3.5 percent, core CPI basically flat at 336.1. The 10-year breakeven inflation rate — which is a market-based measure of expected inflation — is at 2.25 percent, down from 2.26. So markets are pricing in lower future inflation. But consumers aren't feeling it. Lucas: And the breakeven rate is actually below the Fed's 2 percent target if you strip out some technical factors. So the bond market is saying inflation will be contained. Yet consumer sentiment indexes are still depressed relative to the macro data. That's the anchoring gap in real time. Luna: So what's the takeaway for listeners? Should they try to 'unanchor' themselves, or is it just human nature? Lucas: I think awareness helps. If you know that your brain is holding onto a past price, you can consciously adjust your reference point. For big purchases like rent or a car, check what the current market rate is — not what you paid two years ago. For groceries, look at unit prices and compare across stores. And for subscriptions, maybe do a quarterly audit: is this still worth what I'm paying, anchored or not? Luna: I like that. And for policymakers, it suggests that communication matters — not just the numbers, but the story around them. The Fed's job isn't just to hit 2 percent inflation; it's to convince people that 2 percent is normal again. Lucas: Which is harder than it sounds, because the anchor from 2024 is still dragging on our perception. But if the data keeps improving — and if core CPI stays flat or dips — over the next year, the anchoring effect should slowly fade. The researchers estimate it takes about 18 months for a price anchor to decay naturally. Luna: So we're maybe halfway through that window. By early 2027, if prices remain stable, people might finally feel like inflation is behind them. Lucas: That's the hope. But in the meantime, every time you open your banking app and wince, just remember — it's not just the numbers. It's the ghost of prices past. Luna: That's a good note to end on. I'll try to keep that in mind next time I'm at checkout. Lucas: Same here. Thanks for listening, everyone. We'll be back tomorrow.