Psychological inflation: Definition and measurement

Thi Thanh Xuan Pham; Thi Canh Nguyen; Huu Tin Ho

doi:10.15549/jeecar.v11i2.1611

Authors

Thi Thanh Xuan Pham University of Economics and Law at Vietnam National University, Ho Chi Minh City, Vietnam https://orcid.org/0000-0002-0345-9664
Thi Canh Nguyen University of Economics and Law at Vietnam National University, Ho Chi Minh City, Vietnam https://orcid.org/0000-0002-4209-9040
Huu Tin Ho Institute for Development and Research in Banking Technology University of Economics and Law, VNU-HCM, Vietnam https://orcid.org/0000-0002-5291-1653

DOI:

https://doi.org/10.15549/jeecar.v11i2.1611

Keywords:

Psychological inflation index, perceived inflation, loss aversion, relative price changes, purchasing frequencies

Abstract

Conventional monetary policy tools became less effective, with nominal short-term interest rates approaching the zero-lower bound during COVID-19. Instead, central banks adopted a range of unconventional monetary policies. Thus, perceived inflation has become a key channel for monetary policy transmission. Despite how vital perceived inflation is, quantifying perceived inflation with accuracy remains questionable and challenging. As a result, we focus on developing a novel measurement of perceived inflation - the psychological inflation index. Our approach is based on psychological theories and considers loss aversion, which creates advancements to previous versions. The new index satisfies many expected criteria: (i) it broadly co-moves with the headline inflation index during everyday contexts; (ii) it captures abnormal price evolution better than headline inflation during crisis periods; (iii) it links tightly with monetary policy and economic dynamics. Psychological inflation, therefore, might be helpful in forecasting headline inflation, estimating real interest rates, predicting economic players' behavior, and setting salaries and prices. Psychological inflation, combined with headline inflation, provides a clearer picture of the credibility of monetary policy.

Author Biographies

Thi Thanh Xuan Pham, University of Economics and Law at Vietnam National University, Ho Chi Minh City, Vietnam

Thi Thanh Xuan Phamis, Associate Professor, is affiliated with the University of Economics and Law at Vietnam National University, Ho Chi Minh City. She is a distinguished "Strong Economic Research Group" member at Vietnam National University, Ho Chi Minh City. Her current focus is on the development of psychological inflation measurement under the supervision of Professor Nguyen Thi Canh. Additionally, she is keenly interested in data science in banking and finance. For more information, please refer to her Scopus Author ID: 57222605022 and her ORCID: https://orcid.org/0000-0002-0345-9664.

Thi Canh Nguyen, University of Economics and Law at Vietnam National University, Ho Chi Minh City, Vietnam

Thi Canh Nguyen is a Professor at the University of Economics and Law at Vietnam National University in Ho Chi Minh City. She is known as the leader of the "Strong economic research group" at Vietnam National University, Ho Chi Minh City. The current focus of her team is on the development of psychological inflation measurement. For more information, please refer to her ORCID: https://orcid.org/0000-0002-4209-9040.

Huu Tin Ho, Institute for Development and Research in Banking Technology University of Economics and Law, VNU-HCM, Vietnam

Huu Tin Ho, MBA is a researcher at the Institute for Development & Research in Banking Technology, University of Economics and Law, Vietnam National University, Ho Chi Minh City, Vietnam. His works focus on financial performance, stability, diversification, and digitalization in the banking sector. For more information, please refer to his works in Scopus ID: 57222723522 and ORCID: https://orcid.org/0000-0002-5291-1653.

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