Inflation and Expectations
Ken Houghton follows up on his previous post.
One of the few honest statements that came out of the Reagan Administration was in late 1982, when the Volcker policies were working but the market was still spooked. “People expect that inflation will be higher than it will be.”
The above compares the University of Michigan’s Consumer Sentiment (prediction of the inflation rate one year forward) with the actual inflation that occurs over that period.
Several things are apparent.
- The official inflation target was not really managed well from 2004-2006. (Alternate explanations welcome; I can think of a few.)
- Consumers assumed the Fed targets were in effect during that period.
- Consumers have consistently overestimated inflation from 2007 onward—and there is no sign of that changing.
- There has been deflation since the beginning of 2009.
- People still believe the Fed target can be hit.
Combining those last two leads to another clear conclusion that I hope has an alternate explanation: Consumers continue to try to believe the Fed target, even in the face of policy failure.
This may explain the “bizarre complacency“; people believe the economy is in a much different place than it is.
But for how long can they ignore the evidence?
To Be Continued…
I have followed the premise that it takes people three years to change their inflation expectations with a great deal of success.
Well if Obama keeps spending money wildly, inflation will be out of control in no time. Fox News is where you can get the straight poop on this issue. Don’t believe the nonsense that comes from pointy heads and crazy liberals at universities. They don’t know “nuttin'” even if they got a Nobel Prize (for stupidity.)
I see. Must be because Fox News thinks the economy is overheating with actual GDP running ahead of potential GDP. One thing I would agree on…what you’ll get at Fox News is indeed “poop”.
if i understand what you are saying here
“people still believe the fed target can be hit”
“consumers assumed the Fed targets…”
the people assume and believe no such thing. they don’t even know there is a fed target.
spencer is about right. people expect the future to be like the past. that’s why in 1982 they were expecting inflation to be higher than it would be. honesty had nothing to do with it.
What really must give our enemies around the world their jollies is to see the US Congress stalemated in wrangling over issues without getting anywhere, the US hopelessly trapped in a war without end, and political divisions wider than ever and more bitter. All symptoms of a rapidly declining power whose world standing is shrinking day by day. Not to mention endless high unemployment and an angry, confused populace that doesn’t know what to do about it. Meanwhile China just sails on from triumph to triumph.
Chuck
and given the thoroughly dishonest nature of both the healthcare debate and the “commission” assault on Social Security, it strikes me that the United Sates neither can nor deserves to survive.
I think that consumer expectations of inflation are only very loosely influenced by Fed targets, and are (perhaps disproportionately) the result of selectively perceived everyday experience.
I know that I — despite trying to keep perspective — tend to notice even modest price increases much more than price decreases. A lot of things are in fact getting cheaper, or getting better at the same price (especially electronics), but I don’t view that as ‘deflation’. In contrast, when milk or utility bills go up even modestly, I immediately perceive that as (potentially unrecognized) inflation (or at least price increaases).
Also — if there is a legacy of the 1970s and 1980s, it is that almost everyone alive through them equates all price increases with ‘inflation’. The situation over the past decade — modest price increases coupled with modest declines in median income — is probably better described by “declining standard of living” rather than by “inflation” or “deflation” (at least, until last year), but the rapid increase in some goods, such as healthcare, feels like inflation because I lived through the 1970s and 1980s. When I then read the CPI, which claims that there is little or no inflation taking place, I simply dismiss the results (emotionally, at least), despite my reasoned interpretation.
“The straight poop” is this is a red herring of an argument that amounts to rearranging the deck chairs. Why? Because our whole GDP-based economy is predicated upon cheap oil, which is reaching its peak production point, afterwhich prices will soar and the Titanic will sink.
Simon Kuznets himself has this to say: “The welfare of a nation can scarcely be inferred from a measure of national income.”