Inflation is accelerating further in the euro zone. In France, consumer prices rose by 6.1% year-on-year in July, according to the latest data released by INSEE. Given that the purchasing power of households is increasingly under pressure, what consequences can we expect in terms of well-being and happiness? Deciphered with Mickaël Mangot, specialist in behavioral economics and happiness economics, professor at Essec and general director of the Institute for the Economics of Happiness.
Inflation legitimately worries many households, especially the more modest ones already struggling to make ends meet. Do we have any idea of the impact this can have on people’s happiness?
Yes, we have a number of studies on the economics of happiness looking at the links between inflation and happiness. They conclude, unsurprisingly, that inflation is detrimental to happiness. When consumer prices rise rapidly, people’s life satisfaction tends to decline.
Why is rising prices bad for happiness?
Researchers have observed three mechanisms that help explain this relationship. First, of course, is the decline in purchasing power. This leads to less consumption of leisure activities (going to the movies, restaurants, going on vacation, etc.) which, in normal times, have a positive effect on happiness, at least in the short term.
Inflation also generates anxiety due to uncertainty about the standard of living. Finally, inflation can fuel the unpleasant feeling of being “cheated.” When the price increase is strong, one can feel cheated by the producers or the distributors if one has the impression that the price increase is not fully justified by the price increase of the raw materials. Likewise, you may be bitter at your employer if they do not respond positively to requests for salary increases and doubt the reasons given (such as the need to stay competitive).
You say that inflation pushes us to consume less. What is the relationship between consumption and the level of satisfaction with life?
Consumption can help increase happiness, but only occasionally. A consensus result of the sciences of happiness is that humans adapt quickly to almost all kinds of changes in their lives. This applies, for example, to purchases of durable goods (a new car, a new house, etc.) for which the happiness increase generated only lasts a few months (for the car) or, at best, , one or two years (the house) . Compare this to the length of credit…
There are some types of consumption that, however, leave more lasting marks on happiness, such as the consumption of experiences (new things we do and that contribute to our identity, such as trips, shows or sporting challenges) or the consumption of multiple leisure activities. If we systematically cut these budgets when inflation reduces purchasing power, this can have significant consequences for happiness.
Does inflation leave long-term traces on happiness and economic behavior?
Yes, we have been able to observe that in the long run, people who had experienced periods of high inflation in the past were less satisfied with their lives than people of similar characteristics who had not experienced the same episodes of high inflation. The idea is that these people remember these periods of high economic uncertainty and this feeds the perception that economic disorder could return. People who have never experienced high inflation, on the other hand, ignore what is written in the history books and neglect the risk of inflation until it… manifests itself. Personal experiences and unlived historical events do not have the same weight in perceptions.
We can see the same phenomenon with saving behaviors. People who have experienced periods of sharp acceleration in inflation subsequently hold fewer fixed-rate investments because they have vivid memories of their decline during periods of rising prices and interest rates.
Faced with rising prices, central banks are just beginning to raise interest rates, at the risk of provoking a recession. Are recessions bad for happiness too?
Yes, definitely. Average happiness in a country follows the short-term growth curve. It rises when growth accelerates and falls during recessions. The relationship is also asymmetric. The effects of negative growth on happiness are stronger than those of positive growth.
Why do recessions greatly decrease happiness?
Recessions reduce (average) happiness, in particular because they fuel rising unemployment. However, the happiness of the unemployed is very low compared to that of active workers (with comparable characteristics). It is clear that personal unemployment is a very negative shock for happiness, to which we do not fully adapt and that leaves long-term consequences.
The increase in unemployment strongly penalizes average happiness because it has repercussions on those who lose their jobs but also on those who fear losing it. Recessions create anxiety about the risk of job loss for many other workers.
Finally, recessions contribute to income stagnation, a negative wealth effect among those who see their financial savings decrease with stock prices, and an increase in precautionary savings. All of this leads to a reduction in consumption (particularly of durable goods and leisure) and, with it, its potential to generate happiness in the short term.
Do recessions have no positive effect for anyone?
Paradoxically, yes. Several counterintuitive positive effects of recessions have been observed. People who were already unemployed before the recession tend to see their load lightened. It has even been observed that for very high unemployment rates (more than 20% in an area of employment), there was no longer any psychological penalty for being unemployed! When the unemployment rate is very high, unemployment is no longer seen as a social stigma.
Another surprising phenomenon, recessions can improve physical and mental well-being because reduced working hours (with reduced overtime) offer more time to… sleep, cook, play sports or take care of children. .
Finally, recessions seem to have a long-term positive effect on highly educated young people starting their careers in these difficult times. Having had a chaotic entry into the job market, their expectations are lowered thereafter; in other words, then they are less megalomaniacs! This renewed humility is such that they later find themselves more satisfied with their jobs and their lives.
Source: BFM TV
