Grumpy Economist: Inflation Expectations

Follow this article Last week’s CPI and PPI rose sharply in March and the level of inflation triggered by CEA storm Reply. (It is also Longer post Opportunities for inflation. )

Ford Management’s “WIN” button

Will inflation come? CEA continues

In the long run, the key determinant of persistent price pressure is inflation expectations.

We are relieved that the survey is not expected to lead to a significant increase in the inflation rate. But when did the survey forecast predict inflation? In fact, most research studies, especially financial research, are used to claim that people are stupid and terrible in predicting the stock market and other variables.

CEA continues

The rise in inflation expectations from abnormally low levels is a welcome development. However, inflation expectations must be carefully monitored to distinguish between the hottest but sustainable scenarios and true overheating.

However, if it is “carefully monitored”, when it is impossible to make excuses, it seems that inflation is breaking out. What do you do then?

This kind of analysis seems to be very common. This is a consensus speech model in the fast track. I don’t choose CEA. They just expressed their willingness. The idea is basically ISLM with expectations. Inflation is equal to expected inflation plus (coefficient) multiplied by the output gap (Phillips curve style). But expectation is an independent force.

Where do these “expectations” come from? If they are indeed not “fixed”, how do you put them back in the bottle? Better presentation? More tweets? WIN button? The Fed and observers reiterated that it has “tools” to enhance expectations. But what exactly are those tools?

This is something we learned in the 1970s, and now seems to have been forgotten by economic history: expectations are determined by action, A clear commitment and policy system. They are not composed of voice and cute buttons.And we didn’t even give a speech-what did the Fed even do committed to What if inflation soars?

The only possible story I can think of is that inflation expectations are “anchored” because people expect that our government will act quickly if inflation really breaks out. Action- There will be strong monetary and fiscal reactions. Even if we do have to pay for the decline of the 1980s style, we will replay the situation in the early 1980s. This time, response measures may require a lot of fiscal and monetary policies.

The government has this tool. But do people believe it will use it? If faced with inflation in the 1970s, will the current administration and the Federal Reserve really raise interest rates to 20% and really carry out the large tax and expenditure reforms needed to stabilize inflation? This will mean economic recession, contrary to the rescue, money printing and stimulus measures we have done in the past two times. Or we will see excuses, temporary factors, and legitimate reasons to worry that the recession will be more disadvantageous to the disadvantaged than others, and there will only be more speeches or “win” buttons on how expectations fall. Or simply, as the leftists in the 1980s argued, inflation is a better option?

So when will you become inactive?It’s simple: when people decide that our government will not adopt rapid and painful fiscal and monetary policies action If inflation is to break out, inflation needs to be controlled.

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