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Why Household Happiness Falls When Prices Rise

[AVIS D’EXPERT] The rise in prices is putting many households in difficulty. And this is not without consequence on their happiness. Decryption with the economist Mickaël Mangot.

Inflation is accelerating further in the euro zone. In France, consumer prices rose 6.1% year on year in July, according to the latest data published by INSEE. As household purchasing power is increasingly under pressure, what consequences can we expect in terms of well-being and happiness? Decryption with Mickaël Mangot, specialist in behavioral economics and economics of happiness, teacher at Essec and director general of the Institute of the Economy of Happiness.

Inflation legitimately worries many households, especially the most modest ones who are 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 in happiness economics that look 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?

Three mechanisms have been observed by the researchers and help to explain this relationship. First, of course, there is the decline in purchasing power. This leads to less consumption of leisure activities (going to the cinema, to 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 about uncertainty about the standard of living. Finally, inflation can feed the unpleasant feeling of being “cheated”. When the rise in prices is strong, one can feel deceived by the producers or the distributors if one has the impression that the rise in prices is not fully justified by that of the raw materials. Ditto, you can be bitter towards your employer if he does not respond positively to requests for salary increases and you doubt the reasons given (such as the need to maintain competitiveness).

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You say that inflation pushes us to consume less. What is the relationship between consumption and level of life satisfaction?

Consumption can help increase happiness, but only occasionally. A consensual result of the sciences of happiness is that humans adapt quickly to almost all types of changes in their lives. This applies, for example, to purchases of durable goods (a new car, a new house, etc.) for which the increased happiness generated only lasts a few months (for the car) or at best one or two years (the house). Compare this to the duration of the credit…

There are some consumptions which however leave more lasting traces on happiness, such as the consumption of experiences (new things that we do and which contribute to our identity, such as trips, shows or sporting challenges) or multiple leisure consumption. If we systematically trim these budgets when purchasing power is reduced by inflation, 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 term, people who had experienced periods of high inflation in the past were less satisfied with their lives than people with 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 fuels the perception that economic disorder could return. People who, on the other hand, have never experienced high inflation, do not pay attention to what is written in the history books and neglect the risk of inflation until… it manifests itself. Personal experiences and unlived historical facts do not have the same weight in perceptions.

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We can see the same phenomenon with savings behaviors. People who have experienced periods of sharply accelerating inflation subsequently have fewer fixed-rate investments because they have vivid memories of their tumble during periods of rising prices and interest rates.

Faced with rising prices, central banks are just starting to raise their interest rates, at the risk of provoking a recession. Are recessions also bad for happiness?

Yes, without a doubt. The average happiness in a country follows the curve of short-term growth. It increases when growth accelerates and falls during recessions. The relationship is also asymmetrical. The effects of negative growth on happiness are stronger than those of positive growth.

Why do recessions greatly decrease happiness?

Recessions bring down (average) happiness, in particular because they feed the rise in unemployment. However, the happiness of the unemployed is greatly reduced 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 which leaves long-term consequences.

The rise in unemployment penalizes average happiness strongly because it has an impact on those who lose their job but also on those who fear losing it. Recessions generate anxiety about the risk of job loss for many other workers.

Finally, recessions contribute to the stagnation of income, to a negative wealth effect among those who see their financial savings decrease with stock market prices, and to an increase in precautionary savings. All of this leads to reduced consumption (particularly of durable goods and leisure) and, with it, its potential to generate short-term happiness.

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Do recessions have no positive effect for anyone?

Paradoxically, yes. Several counter-intuitive positive effects of recessions have been observed. People who were already unemployed before the recession tend to see their burden lighten. It has even been observed that for very high unemployment rates (over 20% in an employment area), there was no longer any psychological penalty in being unemployed! When the unemployment rate is very high, unemployment is no longer seen as a social stigma.

Another astonishing phenomenon, recessions can improve physical and mental well-being because the reduction in working hours (with the reduction of overtime) offers more time for… sleeping, cooking, playing sports or taking care of children. .

Finally, recessions seem to have a long-term positive effect on highly educated young people who start their careers in these difficult times. Having had a chaotic entry into the job market, their expectations thereafter are lowered – in other words, they are then less megalomaniacs! This renewed humility is such that they later find themselves more satisfied with their jobs and their lives.

Interview by Jean-Louis Dell’Oro

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