The Invisible Hand of 'Revenge Holidays': The Impact on UK's Inflation
Last week, I took a survey and did a comprehensive exploration into the recent inflation figures for the UK and what I found was quite surprising. The methods employed, along with the resultant outcomes, provide us with a unique insight into the mechanics of post-pandemic economics and spending behaviours.
The Methodology and Findings
My approach was to examine every product and service at a granular level, categorising them into two distinct sections: items people desire to spend their money on, versus those they need to spend money on, such as electricity.
The results were remarkable. Almost every category of spending rooted in what people want to spend their money on, witnessed deflation over the preceding month. The only exception? Anything associated with holiday spending. This category saw not only the most significant monthly increases but also the most substantial annual inflation spikes.
The "books and magazines" category initially didn't catch my attention, until I had an epiphany. I remembered purchasing two books during my last airport visit. Could others be doing the same? The answer, it seemed, was a resounding yes:
Want vs Need: A Critical Distinction
The distinction between what consumers want and what they need to spend money on has profound implications for understanding inflation. When people desire a commodity, they have the option to pay more for it, pushing up its price. However, when it comes to necessities, the consumer is not in the position to choose. It's challenging, then, to argue that higher interest rates will deter spending when consumers have no choice but to spend more on core items like electricity.
Deflation Worries and the 'Revenge Vacation' Phenomenon
Should we worry about deflation, considering the only thing bolstering the inflation rate is holiday spending?
If there was a permanent shift towards people spending more on holidays, we might anticipate inflation to continue to rise. However, these holiday trends seem to be spurred by 'revenge vacations' post-COVID. After years of lockdown and travel restrictions, people have not only resumed holidaying in 2022 but have taken even larger vacations in 2023:
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My recent LinkedIn survey confirmed my suspicions about unusually high holiday spending. If we were to remove the surge in holiday spending and its associated expenses, like books, cameras and restaurants, we would observe that everything else has actually deflated in price over the past month:
The Economical Implications: Is This a Coincidence or a Hidden Economic Trend?
Is this a coincidence, or a sign that the economy is not being fully evaluated concerning the money people saved during COVID lockdowns?
This leftover money, as opposed to regular income, could be another reason to believe that this inflation is transitory, not permanent:
If holiday spending hadn't seen a dramatic rise this year, we would have noted a decrease in inflation overall, given that the increase for holidays is so large that it outweighs the decreasing in other products from last year. Yet, the continually rising interest rates are affecting the most vulnerable, those who couldn't afford a holiday now even if they wanted to.
In conclusion, the current inflation figures may be misleading due to the unique economic conditions caused by the pandemic and the resulting 'revenge vacations.' While it's easy to assume we're in a period of inflation, it's crucial to consider the context behind these spending habits. Only time will tell if this pattern will continue, but for now, it's clear that a new economic narrative may be forming beneath the surface.
Given that the increase in holiday spending seems to be funded by Covid savings and other lump sums of money, as opposed to debt (which would reduce the future spending power of the individual) or regular income, it is unlikely that this trend will continue to be observed going into the future. Therefore, it may be plausible to expect a significant decrease in inflation as we move into the autumn/winter, when holiday spending will no longer be feeding into the overall inflation figures. At this point, a greater number of individuals will additionally be repricing other commitments, such as mortgages, at a higher interest rate, further reducing their spending power.
Should we prepare for a significant decrease in inflation and interest rates by the end of 2023?
Founder at Systems Behavioral Research
1 年Claire Trythall, here's how you've already done better than, e.g., the English Housing Survey (https://www.dhirubhai.net/posts/oliver-keene-04552616_adherence-perprotocol-effects-and-the-activity-7089150618358947840-hj4B): 1) You don't impute missing responses. Machine learning methods like Random Forest demand missing data be imputed. This is subject to bias, if not fraud, as recently shown (https://datacolada.org/111). My method has a missed-event correction, but only a dead-time sensitivity parameter is assumed. 2) You don't talk about statistical significance, as if you already knew what a distribution should look like. My method is more observational. 3) Your respondent "profile" wasn't skewed from one year to the next by COVID, forcing you to modify survey methods and torture/correct the results, again, as if you already knew them. In a repeating survey, some repeat respondents are essential to see changes on an *individual* level, where the action is. But your question #7 relies on respondents' memory...you should poll them twice and take the difference to avoid bias. My method takes this to the extreme, requiring an observed state dwell time progression for many individuals, to infer any common system dynamics.