The Perils of Headline Thinking
“Seattle registers largest increase in inflation in three decades”
— The Seattle Times, Feb. 7, 2022
“Numbers become evidence by being in relation to.”
— Edward Tufte
It’s conventional wisdom to say our current inflation rate is bad. The headline from the Seattle Times sums up the mood. But what does it mean to you, and does it even matter?
To discern the truth in a headline, think like Edward Tufte, founder of information design and hero to Fortune’s Path: look at the context.
The Seattle Times does an incomplete job of building context around inflation in Seattle. Take a look at their graphic.
Chart: Alison Saldanha / The Seattle Times Source: Bureau of Labor Statistics
Where is the Inflation Coming From?
The inflation rate has increased dramatically since 12 months ago, but where is the increase coming from? And what is 7% compared to historic norms?
Here’s a chart from the Bureau of Labor Statistics about where inflation is coming from.
Source: U.S. Bureau of Labor Statistics
Gasoline prices went up almost 50% from December of 2020 to December of 2021. Used car prices had their biggest 12-month jump in the history of the index. A lot of that 7% number is concentrated in a few parts of the economy.
Back in July of 2021, the White House put out a long article about the current inflation rate compared to historic inflation.
It’s worth a read and is a good example showing that, “Even people with obvious biases can say truthful and useful things.”
Here’s the money chart:
Source: Federal Reserve Economic Data, Haver Analytics, CEA Calculations (via Whitehouse.gov)
Our current inflation rate is a lot higher than we got used to following the great recession of 2008, when inflation went super low, but it’s nothing like what we’ve seen in the past. The real test is what happens next. The White House says, “Look to WWII,” to know. I hope they’re right before we get to 20%.
Trying Not to Think in Headlines
Business is a struggle between what is and what can be. It’s easy to over generalize and think in headlines. We do it to save time, but it rarely leads to a view of the truth that gives us an advantage. We want to build our vision before our competitors do; information advantage is a core part of that process.
Many people mistake contrarianism for information advantage. Contrarianism is dismissing conventional wisdom just for the fun of it. It’s also mostly wrong. For an example, look at this 1988 article from the New York Times where a contrarian commentator makes a smart sounding case for why the US should adopt economic policies like Japan’s. This is about a year before Japan entered an economic crisis from which it has yet to recover. It’s not hard to find disastrous examples of contrarianism; I bagged the above with a single Google search.
We landed on the moon, Elvis is dead, and vaccines work. Thinking you’re right and everyone else is wrong may be super appealing, but it’s mostly super stupid. Context is a lot harder than just “think different.”
So what does this mean for your business?
Inflation may be nothing to you other than offer an excuse to raise prices. Data only make sense in context.
Headlines and bullet points don’t create context. Inflation matters if you have to buy used cars. If you have to buy prescription drugs, not so much.
Beware of arguments that depend on assumptions about what’s going to happen next. Instead, look to interpret history better than others.
Not all biases are show stoppers. If you run across someone who thinks the moon landing was faked, ask them if there’s any evidence that could convince them otherwise. If they say no, they’re not holding a rational belief. If they say yes, you have a starting point for rational discussion.
Information advantage isn’t the same thing as contrarianism. Contrarianism is mostly wrong.
If you want to sound smart, find the TL;DR for an article. If you want to be smart, read the whole article.