Consumer and investor expectations for inflation are so important that Federal Reserve Chairman Ben Bernanke mentioned them 17 times at his first-ever news conference. Congress has charged the Fed with maintaining price stability, so it is understandable that the Fed Chairman would watch inflation expectations closely.
The problem is that economists are not certain how inflation expectations are formed, which stymies efforts to influence those expectations.
Research by Harvard Economics Professor Greg Mankiw found that consumers and investors often have widely different expectations for inflation and often base those expectations on only narrow aspects of economic news. Even with these limitations, many experts contend that these expectations cannot be ignored
In an email, Mankiw writes, “[Inflation expectations] matter because they affect behavior, even if people are not fully rational in forming their expectations. But it is surely a topic about which reasonable economists can disagree.”
One of those disagreeing economists is Wrightson ICAP’s Lou Crandall. Crandall says, “One of the biggest criticisms of the way the Fed talks about its policies is that it seems to have this very rigid, unrealistic notion of what inflation expectations are and how they operate. I don’t think they are inflation expectations, I think they are only inflation anxieties.”
Crandall says Bernanke and others should factor inflation expectations into their decisions in “a general way,” rather than relying on a specific number derived from a survey.
However inflation expectations are set, Chairman Bernanke is determined to see that they remain “well anchored,” even if it is not always clear what they are anchored in.
Similar Posts:
- Markets Suffer a Case of the Monday’s Thanks to Euro Zone (JPM, GRPN)
- 7 Tips for Talking About Money as a Couple
- Dick’s Sporting Goods Stock Makes New High on 27% Higher 4Q Net
- Inflation Out of Sight
- Stocks Mixed as Anxiety Over Europe Continues
