When central bankers announce that inflation has cooled to target, and yet the supermarket checkout still induces mild vertigo, the temptation is to assume someone is lying. They are not. The disconnect between headline inflation figures and the visceral sense that everything costs too much reflects a genuine measurement problem—one that reveals as much about human psychology as it does about economics.
The core issue is that price indices are designed to track the cost of a representative basket of goods over time, adjusting for quality improvements and substitution effects. Your brain, meanwhile, is designed to remember the price of eggs last Tuesday and feel personally affronted when it changes. These are fundamentally different projects.
The basket versus the receipt
Official inflation measures like the Consumer Price Index weight thousands of goods and services according to how much the average household spends on each category. Housing, transport, and food dominate; the artisanal oat milk you have developed a dependency on does not move the needle. When statisticians report that prices rose a modest percentage over the past year, they are describing an abstraction—a hypothetical household consuming a hypothetical basket in hypothetical proportions.
Real households, of course, are not hypothetical. A family with young children spends disproportionately on childcare and diapers, categories that have outpaced headline inflation for years. A retiree on a fixed income notices pharmaceutical costs with painful clarity. A city-dweller who does not own a car is unmoved by falling petrol prices but acutely aware that rent has become a competitive sport.
The index captures none of this specificity. It was never meant to.
The psychology of price memory
Behavioral economists have documented that humans are loss-averse, asymmetrically sensitive to price increases, and remarkably good at anchoring to past prices while ignoring quality improvements. When your phone costs the same as it did several years ago but now contains a supercomputer, the index records deflation in that category. You record that phones are still expensive.
Moreover, we shop frequently for groceries and fuel—items with high price volatility—while encountering rent or insurance bills monthly or annually. The result is that the most psychologically salient prices are often the least representative of overall inflation trends. A sharp spike in egg prices, driven by supply disruptions, dominates dinner-table conversation even as durable goods quietly cheapen.
What the gap actually tells us
None of this means inflation statistics are useless or manipulated. They serve their purpose: providing a standardized, comparable measure that policymakers can use to calibrate monetary decisions. The problem arises when that technocratic tool is communicated to a public that reasonably expects it to describe their own experience.
The persistent gap between measured and felt inflation has political consequences. Voters who are told the economy is healthy while their purchasing power feels diminished conclude, not unreasonably, that elites are out of touch. This is not entirely wrong—the elites in question are measuring something real but abstract, while voters are living something specific and concrete.
Our take
The inflation number is not a lie, but it is a simplification so aggressive it borders on fiction for any individual household. Central banks cannot target your grocery bill specifically, nor should they try. But governments and economists would do well to acknowledge the gap more honestly rather than treating public skepticism as ignorance. When the data and the lived experience diverge this sharply, the data is not wrong—but neither are the people.
