Global inflation is finally cooling. Central banks are reporting progress, headline numbers are improving and the urgency that defined the past two years has eased. Yet many households do not feel real relief. House prices remain elevated, travel feels more expensive, school fees continue to rise and everyday purchases do not seem any cheaper.
This gap between what economic data suggests and what households experience is not a contradiction; it is the modern expression of what economists call money illusion – the misalignment between numerical improvements and lived financial reality. Economists have long warned against money illusion, a concept first articulated nearly a century ago to describe the gap between nominal change and real purchasing power.
In today’s context, headline inflation is easing, but the structural and behavioural forces shaping household spending have not yet adjusted.
As in trading and investment, understanding what sits beneath the surface helps us make better decisions, remain disciplined and keep long-term objectives in focus.
Prices fall slowly, especially for services
When inflation surged globally, businesses faced immediate increases in wages, logistics, imported materials and financing costs. Prices adjusted quickly because there was no alternative. When inflation moderates, however, the adjustment is far slower.
In the UAE, many of the largest household expenses like housing, schooling, transport and services are set through annual contracts or long pricing cycles. Landlords revise rents periodically; schools review fees infrequently and rarely reduce them; service providers anchor prices to past cost pressures. As a result, even as inflation cools, household budgets still reflect last year’s environment.
This price “stickiness” mirrors financial markets, where some assets reprice instantly while others adjust gradually due to structural friction.
Imported inflation and the currency effect
Another important factor is imported inflation, an unavoidable feature of a globally connected economy.
The UAE sources a substantial share of its goods and services from abroad. When supplier countries experience cost pressures, these eventually feed into local prices. Even if domestic inflation eases, imported components can keep specific categories elevated.
Food, energy, manufactured goods, electronics and aviation services all sit within global supply chains. Disruption or cost increases abroad eventually reach local shelves, which is why inflation often feels concentrated in everyday categories rather than evenly distributed.
Currency movements amplify this effect. The dirham’s peg to the US dollar remains a cornerstone of financial stability but it also means residents feel the impact of the dollar’s global fluctuations. When the dollar weakens against other major currencies, the dirham weakens with it.
This directly affects three common expenses: overseas travel, education abroad and remittances. A stronger euro or pound means higher holiday costs. Tuition fees denominated in foreign currencies require larger dirham outflows. Families sending money home must remit more to deliver the same value.
This dynamic often creates the sense that “everything is getting more expensive”, when the underlying driver is currency movement rather than local inflation.
Why the pressure feels sharper
Behaviour plays a critical role. In both trading and personal finance, losses are felt more intensely than gains.
Households immediately notice rent increases, higher fees or pricier travel, while stabilisation or modest declines elsewhere go largely unnoticed. At the same time, salary adjustments tend to lag behind rising costs, compressing disposable income and reinforcing the feeling that inflation remains high. Perception, not just data, shapes financial behaviour.
Applying risk management at home
The same discipline used in markets applies effectively to household finances.
First, separate what you can control from what you cannot. Inflation and exchange rates sit outside individual control, but foreign exchange (FX) exposure, discretionary spending and debt do not.
Second, build an FX-aware budget. Distinguish between local expenses, imported goods and currency-dependent obligations such as education or remittances. Third, manage FX exposure proactively. Plan major payments ahead and avoid last-minute currency decisions.
Finally, limit leverage. Just as leverage amplifies volatility in trading, debt magnifies cost pressures in daily life.
Anchor life goals, not inflation headlines
Inflation, interest rates and currencies are cyclical. Life goals such as financial security, education, housing and retirement, unfold over decades. Anchoring decisions to short-term economic noise risks reactive choices that undermine long-term stability.
Disciplined traders focus on strategy, not headlines. Households benefit from the same mindset: define long-term objectives, adjust tactically when needed, and avoid emotional overreaction.
Closing the perception gap
Inflation is easing. But lived experience is shaped by slow price resets, imported inflation, currency movements and behavioural bias. Recognising these forces allows households to interpret conditions more clearly and respond more effectively.
“Money Illusion 2.0” is not about ignoring data; it is about understanding why the data does not tell the whole story. And as with sound risk management, clarity leads to better decisions, greater resilience and a more confident path toward long-term financial goals.
Roberto d’Ambrosio is chief executive of Axiory
