lation pushes up prices before it pushes up wages. Many people understand prices rise because of inflation. But they seem to attribute nominal increases in their wages more to their own accomplishments than to the feedback effect of inflation. To the extent that they acknowledge feedback effects, most Americans seem to believe in a "lagged wage-price" model of the economy. That is, they assume that price increases occur first and wage increases follow, often much later. Shiller's survey found a striking number of people -- over 75 percent of respondents -- believe that their income would not fully adjust for several years after an inflationary episode. Economists have tried to measure whether wage increases lag price increases since the 1890s but have consistently found the relationship difficult to estimate. Many people also dislike inflation because they feel it makes it easier for the government, employers, financial institutions, and others to deceive them. Thus, over 70 percent of Shiller's respondents agreed that "One of the most important things I don't like about inflation is that the confusion caused by price changes enables people to play tricks on me, at my expense." Thus, some employers may "forget" to raise their employees' wages as much as inflation thereby giving them a real pay cut. There is evidence that people do get fooled, at least initially, about their real wages. Economists Peter Diamond, Eldar Shafir, and Amos Tversky argue in their recent paper, "On Money Illusion," that people seem to base their sense of satisfaction on nominal earnings, rather than real earnings. Similarly, Shiller found that over half of his respondents agreed with the statement that, "I think that if my pay went up I would feel more satisfaction in my job, more sense of fulfillment, even if prices went up just as much." Inflation creates other opp...
