A phenomenon we described earlier is money illusion, i.e. the tendency of households and companies to ignore inflation in their economic decisions. However, it is also hypothesised that this tendency diminishes if inflation is sufficiently high. The theory of rational inattention implies that agents incur costs in obtaining information and therefore optimise their decisions accordingly. But there are also psychological explanations related to how visible price increases are. The literature on inflation expectations among households has found that expectations are affected by visible price changes. A hypothesis is therefore that there may be an “attention threshold” when inflation becomes important for economic decisions. In recent years, as inflation has risen sharply, several central banks have highlighted this possibility.^[41] See for example Nagel (2022), Bayarmagnai (2023), Bracha and Tang (2022), Braitsch and Mitchell (2022) and Norges Bank (2023).

In the spring of 2022, households’ expectations of their finances, as measured by the Economic Tendency Survey, fell very sharply, while inflation rose rapidly (see Figure 1). This is well in line with research showing that households associate rising inflation with a decline in living standards. As inflation rose, real wages fell very sharply. In its Monetary Policy Reports, the Riksbank has emphasised the importance of inflation falling towards the target, so that real wages can begin to rise again and living standards among households can improve.

Figure 1. Expectations of own finances and CPIF inflation Net figures and annual percentage change