Investment Updates
A Time Of Money Illusion
Published Friday, November 24, 2023 at: 10:51 PM EST
Money illusion, the tendency to view wealth and income in nominal terms, rather than their real value, is being cited to explain the disconnect between the strong growth in the economy and sentiment of consumers and investors.
Money illusion partly explains why consumer sentiment is not far above an all-time low while the economy is actually strong. People tend to notice higher prices but gains in wages after inflation is recognized not so much. You know that you’re paying more for food and that filling a grocery bag before adjusting for inflation costs more nominally. The money illusion makes people overlook the real cost of groceries after-inflation and wage hikes. The money illusion makes people focus on higher nominal prices and not consider real prices.
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