When does inflation become too high? Thresholds in the inflation–happiness relationship

Working paper

This paper documents a threshold relationship between inflation and national happiness using annual data from 81 countries between 2006 and 2024. I show that inflation negatively impacts happiness but only when inflation exceeds 5%. Below this level, I find no effect of inflation on a country’s overall wellbeing. This null result is primarily driven by inflation observations in the range of 2% to 5% which appear to have no impact on happiness. This finding departs from the existing literature, which typically assumes a linear effect of inflation on happiness. I estimate a dynamic panel threshold model that controls for unobserved heterogeneity across countries as well as time-varying macroeconomic indicators. I also show that national happiness scores display high levels of persistence in the dynamic model, a fact which previous panel studies of happiness have ignored. I argue that the lag of happiness, which is correlated with contemporaneous happiness and inflation, is thus an essential control variable. The threshold relationship between inflation and happiness is robust across alternative specifications, well-being measures, control sets and estimation methods, and it can be considered causal under strong but plausible assumptions.

Authors: Steeley, A

• Publication status: Published
• Publisher: University of Oxford
• Series: Department of Economics Discussion Paper Series
• Place of publication: Oxford
• Publication date: 2025-12-22
• Paper number: 1104
• Language: English