Think You Know Inflation? Four Common Economic Myths Debunked

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• Public perception of inflation often focuses on frequent purchases, like groceries, leading to misconceptions that don’t align with broader economic realities.
• Tariffs, while politically popular, increase prices for both imported and domestic goods, reducing competition and placing a long-term burden on consumers.
• Productivity is a complex metric often misunderstood and underestimated due to untracked activities like gig work and technological shifts.

Inflation has a direct impact on daily life, eroding the purchasing power of households and increasing the cost of essential goods and services. This burden is felt disproportionately by lower-income households, for whom a greater percentage of income is spent on necessities like food and fuel.

Public perception of economic realities often hinges on personal experience rather than data, leading to misunderstandings that persist for years. "Consumers focus on high-frequency purchases like groceries and fuel," says Paul Donovan, Chief Economist at UBS Global Wealth Management. "but this creates an illusion of inflation that doesn’t reflect broader trends."

Paul, who has been with UBS since 1992, is a seasoned political economist knowledgeable in complex economic concepts. He is the author of several books, including "The Truth About Inflation”, and regularly provides insights to wealth management clients, helping them understand long-term macroeconomic trends and their implications. His approach emphasizes cutting through jargon to help people recognize the economic decisions they make every day.

Paul believes that many misconceptions about inflation, growth, and policy persist because of how narratives are shaped by frequent purchases and sensationalist media. His insights challenge us to look beyond personal biases and consider the structural drivers of economic outcomes.

Analyzing common economic myths

Economic myths often stem from how people perceive their daily lives, especially when complex phenomena are boiled down into oversimplified narratives. These misconceptions, while easy to adopt, fail to account for the nuanced realities of global economic systems. As a result, they not only misinform public understanding but can also influence poor policy decisions.

Here are four prevalent myths about inflation, growth, and policy and the truth behind these misconceptions.

Myth #1 – Inflation is always what it seems

The belief that inflation is entirely reflected in the rising prices of everyday goods is deeply ingrained in public perception. This is particularly evident in items like groceries and snacks, which people purchase frequently. Paul explained, “If you’ve got it stuck in your mind that the Snickers bar used to cost me two euros, that’s the fair price for Snickers. And now it costs three euros. Every time you buy a Snickers bar, you’re thinking the fair price is Snickers two euros, and I’m paying three.”​

This perception is further distorted because these frequent purchases reinforce the illusion of constant inflation. “For 18 months minimum, every time you buy a Snickers bar, you’re thinking, ‘Oh, inflation is out of control,’” Paul said. However, he noted, “The price has been three euros for the last 18 months. It’s just that mentally, you’ve still got a benchmark of two euros stuck in your brain​.”

High-frequency purchases dominate consumer focus, overshadowing the broader picture of inflation. Paul emphasized this bias, stating, “The problem is that two euros is the fair price stuck in your mind, and it typically sticks for 18 months to two years​.”

Debunking the myth

Inflation is not a uniform phenomenon; instead, it consists of distinct phases driven by different factors. Paul described the first of three separate inflation episodes in recent years: “The first inflation episode back in 2021 was transitory inflation. Temporary inflation. And it was temporary​.”

He elaborated that the first wave stemmed from pent-up consumer demand after the pandemic, which overwhelmed global supply. “People concentrated their spending on goods,” he said, noting that demand surged to the highest levels since 1948. As supply reached record highs, demand still outpaced it, driving prices upward. By 2022, however, “durable goods prices were starting to fall. Not lower inflation—lower price levels.”

The second wave arose from the war in Ukraine, leading to an energy price shock unrelated to goods inflation. As Paul put it, “The energy shock fades, and we then come into the third wave of inflation… profit-led inflation,” where retailers raised prices disproportionately to costs, driven by consumer acceptance of higher prices​.

Myth #2 – Tariffs are harmless or beneficial

There is a persistent belief that tariffs, as tools of economic policy, protect domestic industries and create minimal impact on consumers. Many proponents argue that tariffs force consumers to buy local, strengthening domestic economies while having little effect on overall prices.

Paul, however, challenges this view, particularly when discussing the impact of tariffs on consumer goods. "Consumers end up paying a tax to the government every time they buy a product, so there is no way that that doesn’t come through in terms of inflation," he states​. This misconception often leads to the false assumption that tariffs can fix trade imbalances without significant costs.

The belief in tariffs’ harmlessness is often bolstered by political rhetoric suggesting that tariffs are a good thing. Paul highlights a historical example: "President Trump put in place a tax on foreign washing machines in the United States. And the result was, prices went up by about 30%. Domestic manufacturers also raised their prices because there was less competition​.”

Debunking the myth

The reality is that tariffs are inherently inflationary and often harm consumers by raising the prices of both imported and domestic goods. Paul elaborates, "When tariffs were lifted, prices came down, but they didn’t return to international norms. Competition never came back. The lack of competition has then put the U.S. consumer at a permanent disadvantage​.”

Selective tariffs, which apply to specific countries or products, can have temporary effects, but universal tariffs—applied broadly—are far more damaging. "Selective tariffs decay over time as supply chains reroute. But universal tariffs don’t have a workaround. That would be very economically damaging," Paul warns​.

Furthermore, the political framing of tariffs as tools to "pay for deficits" is fundamentally flawed. "China’s going to pay for our deficit," Paul recalls of past rhetoric, emphasizing, "Of course, that’s complete nonsense.” In practice, tariffs are a tax borne by consumers, eroding purchasing power and creating long-term economic inefficiencies.

Myth #3 – The U.S. economy is exceptionally resilient

The narrative of U.S. exceptionalism often paints the American economy as uniquely robust, driven by superior innovation and entrepreneurial spirit. This belief is particularly prevalent when comparing U.S. growth rates to other regions, such as Europe or Asia.

Paul, however, points out the selective nature of this narrative. "We hear a lot about American exceptionalism and Europe dragging behind. There isn’t actually that much exceptional about the United States in terms of growth differentials," he explains​. Much of the perceived resilience stems from high deficits, which fuel short-term growth but carry long-term risks.

Sentiment polls further reinforce the myth, but Paul argues these are often skewed by political biases. "Sentiment polls are, however, completely useless," he remarks. "One of the interesting things here is that Republicans are more emotional than Democrats are in surveys. So the negativity of Republicans is far more negative, and the positivity far more positive​.”

Debunking the myth

The U.S. economy’s growth is heavily reliant on deficit spending, which is not sustainable indefinitely. "Real wages are well above where they were four years ago, but that’s largely driven by deficit spending," Paul notes, adding that this reliance obscures the underlying structural vulnerabilities​.

Furthermore, the introduction of random tariffs and unpredictable policy decisions underlines significant risks to the U.S. economy. "The President-elect is coming up with random tariffs, left, right, and center, of random amounts. That’s extraordinarily disruptive to complex supply chains," Paul explains​. Such disruptions could weaken the very resilience touted by advocates of U.S. exceptionalism.

Despite these challenges, Paul acknowledges that the middle-income consumer remains a stabilizing factor. "Low unemployment, low fear of unemployment, and real incomes higher—all of this provides a solid basis for the economy," he says. However, he cautions that this foundation could erode if policy uncertainties persist​.

Myth #4 – Productivity can be easily measured and improved

Productivity is often presented as a straightforward metric for economic health, with the assumption that governments can implement policies to boost it effectively. This belief persists despite the complexity of measuring productivity and understanding its drivers.

Paul is blunt about this misconception: "Productivity is everything economists do not understand summarized in a single statistic. It is literally a residual," he states​. The difficulty of measuring productivity stems from untracked economic activities, particularly those enabled by technological and societal changes.

For example, Paul highlights the gig economy’s impact: "There is economic activity taking place that the statistical agencies are just not able to track. You will not find TikTok content creator listed as a job. Yet, it is entertainment, advertising, and it pays substantial amounts of money​.”

Debunking the myth

The inability to measure productivity accurately complicates efforts to improve it through policy. Paul points out, "Governments can’t put in place policies to raise productivity because we don’t even know how much productivity growth is at the moment​.” This gap in understanding underscores the limits of policy interventions aimed at boosting productivity.

Additionally, technological advancements often lead to more efficient use of existing resources rather than measurable output growth. "The UK economy is making better use of its capital stock," Paul explains, but GDP data fails to capture this improved efficiency​. As a result, traditional metrics of productivity often understate actual economic progress.

Ultimately, Paul emphasizes the importance of adapting to structural changes rather than attempting to impose top-down solutions. "A new economic model will emerge whether we want it or not," he concludes, underscoring the inevitability of change​.

Rethinking Economic Myths

Economic misconceptions shape public perception and influence policy in profound ways. By examining these myths with a critical lens, we uncover the deeper complexities of inflation, tariffs, growth, and productivity. Understanding these nuances is essential for making informed decisions in an interconnected global economy.

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