How Are Our Perceptions of Inflation Hurting Brand Loyalty?

Why Do We Feel Like Prices Are High Even When Inflation Is Down?

Discover how behavioral psychology shapes consumer perceptions of inflation and why a small group of “price experts” drives the narrative. Learn crucial communication strategies for businesses to explain price increases and protect their brand value.

Read the full summary to understand the behavioral science behind consumer inflation perceptions and learn actionable strategies for communicating price changes without damaging your brand’s reputation.

Recommendation

US and UK inflation metrics reached their high-water marks in May 2022,yet consumers’ erroneous perceptions of price levels continue to affect their spending behaviors and financial decisions. Consultants Henry Stott, Benny Cheung, Jerry Luukkonen, and Alice Pearce undertake a comprehensive analysis of how consumers form their opinions and ideas about inflation and prices. Consumers are frustrated, but their beliefs about prices often do not align with the data. Investors, executives, and business owners will find this an insightful review of the behavioral dynamics underpinning inflation.

Take-Aways

• Inflation peaked in 2022, but consumers still consider inflation to be high.
• A minority of consumers shape the narrative on most price hikes across a variety of goods and services.
• Companies must attend to their messaging and communication when explaining price increases.

Summary

Inflation peaked in 2022, but consumers still consider inflation to be high.

Across Europe, the United Kingdom, and the United States in 2021 and 2022, consumers faced elevated prices for a spectrum of goods and services. Price levels peaked in 2022, however, and inflation rates have since normalized. Yet consumers remain disgruntled over costs that are now substantially higher than they were prior to 2021. The cost of living crisis has delivered inflation levels in the UK, USA and EU not experienced by consumers for a generation. Consumer grumbling about prices and inflation has as much to do with behavioral psychology as it does with headline price levels and sticker shock for items and services. In this context, “price rise perception” plays a pivotal role in how people assess inflation and its implications for purchasing power and spending decisions.

“Because inflation judgments originate from a combination of events, they are weakly correlated with reality. In practice, many people overestimate inflation.”

Consumers’ perceptions of inflation and actual inflation numbers can differ dramatically. Typically, buyers often believe prices are higher on certain goods and services than their cost to providers could justify; for example, some retailers will suddenly charge more for snow shovels because of a blizzard.

A minority of consumers shape the narrative on most price hikes across a variety of goods and services.

A relatively low percentage of consumers actively engage in monitoring inflation pressures. Specifically, 12% of consumers are responsible for roughly two-thirds of “price rise noticing.” These “price experts,” tend to be “older, married and middle-income earners.” The price experts form their opinions and judgments on prices based on information from a variety of channels, including media, conversations with friends and peers, and comparing prices for goods and services against their memories of prior prices.

“The headline, then, is that people’s price rise perceptions are derived from many sources and are not particularly scientific or accurate in that sense.”

These impressions of inflation and price levels have spillover effects that travel beyond the consumer checkbook. Much of these downstream impacts center around the consumers’ feelings about the “fairness” of prices charged by companies. If consumers feel a price is unfair relative to its historical norm, their spending habits may radically change, and their belief in the integrity of a brand may erode.

“People not only tradedown and buy less in response to inflation, but they also do a lot of complaining. This has knock-on effects that can cause greater damage to enterprise value.”

Consumer attitudes on prices and inflation depend on the industry providing the good or service. A specific case involved energy in 2022, when four out of five consumers believed prices for electricity and gasoline were extreme and not warranted. Users tend to view energy producers unfavorably as prices rise. In the case of 2022 energy prices, consumers did acknowledge the war in Ukraine as a proximate cause for elevated prices.

Companies must attend to their messaging and communication when explaining price increases.

When considering price increases, businesses across all industries should craft language that appropriately explains to consumers the underlying rationale for the increase. Without issuing explanations, companies risk short-term and long-term damage to consumer purchasing decisions and brand resilience.

“Providing reasons for price rises has as much — if not more — of an impact on customer behavior as the amount of price rise. Businesses need to communicate the narrative underlying any price increase. Providing no reason is typically the worst strategy.”

Overall, consumers do not look favorably on demand-driven price increases, which they believe are a form of corporate avarice. Conversely, if a company communicates that price increases stem from higher input costs, consumers’ reactions prove more benign. A push/pull dynamic exists between companies and customers regarding inflation: While only a small percentage of consumers shape the inflation narrative, companies’ management of the reasoning and communication for price increases is critical to the macro inflation dynamic.

About the Authors

Henry Stott is a co-founder and managing director of Decision Technology (DecTech), a UK consultancy that applies behavioral science to business. Benny Cheung is a director, Jerry Luukkonen is a senior associate, and Alice Pearce is a senior associate research analyst at Dectech.