Inflation Perception and Relative Price Variability: An Experimental Study

Standard macroeconomics assumes that the cost of inflation is particularly high if inflation distorts relative prices. If price setters adjust their nominal prices in a non-synchronized way, i.e., if inflation causes relative prices variability, consumers are forced re-optimize their consumption choices permanently. In contrast, with synchronized price adjustment, re-optimization is not necessary. This study investigates how relative price variability affects the perception of past inflation in addition to distorting consumption choices. In the experiment, consumers are repeatedly presented with a list of goods and prices from, which they can shop. In one treatment, all prices increase by at the same rate while in the other treatment rates are different across goods. Although, the findings show that relative price variability leads to efficiency losses in reoptimizing individual decisions, the efficiency losses are not statistically significant. Also, we show that the distribution of inflation perception is not statistically significantly different in relative price variability comparing to a synchronic increase in prices.