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Inflation outlook: 'Confusion is certainly better than being wrong', professor explains

Some market participants had a sigh of relief after July’s consumer price index (CPI) report came out better than estimates suggested. President Joe Biden touted both the report and last Friday’s jobs report as evidence of economic recovery.

However, other officials, like San Francisco Fed President Mary Daly, warned it was too early to celebrate as inflation remains far from the Fed’s desired 2% target rate.

Debates over the state of the economy have fueled varying levels of market sentiment.

Barry Schwartz, a psychologist and visiting professor at UC Berkeley Haas School of Business, discussed how investor sentiment is a strong indicator of how consumers behave and where the economy is headed.

“Confusion is better than simply being wrong,” Schwartz told Yahoo Finance Live. “If we’re uncertain about the future, it’s not going to lead to a kind of systematic explosion of expectations about what prices are going to be in the future. If we just don’t know what prices are going to be like in the future, chances are pretty good that we’ll behave the way tomorrow we behave today.”

Psychologists call this concept a self-fulfilling prophecy – when future beliefs or expectations influence subconscious behavior. Nobel prize-winning economist, Robert Schiller, alluded to the idea when talking about his expectations of the U.S. crossing recession territory.

Customers shop at a supermarket in Millbrae, California, the United States, Aug. 10, 2022. U.S. consumer inflation in July surged 8.5 percent from a year ago, down from the previous month's fresh four-decade high but still at an elevated level, the U.S. Labor Department reported Wednesday. (Photo by Li Jianguo/Xinhua via Getty Images)
Customers shop at a supermarket in Millbrae, California, the United States, Aug. 10, 2022. U.S. (Photo by Li Jianguo/Xinhua via Getty Images) (Xinhua News Agency via Getty Images)

“The fear can lead to actuality,” Schiller explained in a Bloomberg interview in June.

Schwartz notes that human psychology plays a major role in how consumers act.

“Our decisions, both whether to spend or save, loosen our belts or tighten our belts, are all based on our predictions [of] what tomorrow’s going to be and that is really in the realm of psychology,” Schwartz explained.

Currently, consumer sentiment is at historic lows. The University of Michigan Survey on Consumers showed that the one-year economic outlook reached its lowest point since 2009 in July.

Much of the anxiety and stress investors are feeling may have come from the 24-hour news cycle, according to Schwarz.

“Prior to the 24-hour news cycle, you just didn’t get bombarded over and over and over again with economic news. You know, trivia changes from one hour to the next. Now, we’re assaulted with it,” Schwartz said.

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Constant coverage has had detrimental effects on Americans’ mental health. The American Psychological Association (APA) found in its annual “Stress in America” survey that nearly two-thirds (63%) of adults said uncertainty about the next few months caused stress, and more than half (59%) said their behaviors changed as a result of stress.

Arthur C. Evans Jr., APA’s CEO, went as far as stating that the 24-hour news cycle made it “hard to avoid the constant stream of stress around issues of national concern.”

Amid all the recession debates and conversations on the economy’s trajectory, Schwartz advises to be more skeptical and reserved.

“Everybody would like to know the secret of what tomorrow is going to be like, but nobody knows the answer to that question. So all I can say is to take all that you’re hearing with a grain of salt,” Schwartz said.

Yaseen Shah is a writer at Yahoo Finance. Follow him on Twitter @yaseennshah22

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