Inflation Expectations Have Arrived

While we’ve all been clamoring that inflation is real, Federal Reserve Chairman Bernanke says “slow down cowboy”. Bernanke tells us that inflation itself does not really matter; it is inflation expectations that actually drive behavior. Until the consumers’ expectation of higher inflation takes hold, they will not demand high wages and start the real inflation spiral in motion. So according to Bernanke, we are safe.

Consumers care little about the Greenspan/Bernanke core inflation, hedonic adjustments, owner’s equivalent rent, or the numerous other statistical games. Inflation expectations are more real than the official calculations. Expectations are the actual measurements of the money consumers spend to maintain their lifestyle. Consumers will only take into account product and service improvements that they actually value. Improvements that consumers don’t want or need might actually be inflationary. The government’s hedonic adjustments do not consider value from the consumer’s prospective.

More standard equipment on a car along with a higher price might not be inflationary to the government. But for the consumer who does not want a fancier sound system and power everything, the cost of their basic car has definitely gone up.

When product operates as part of an ecosystem, improvements required by the system are inflationary to the consumer. Examples include pollution control equipment on cars and higher performance computers to make full use of the internet. The consumer has to pay more to get the same level of enjoyment, but the government says they are getting added value.

The Wall Street Journal “Inflation Data May Create A False Sense of Security” reports that one-year consumer inflation expectations are now 4.8%. I realize that job one for Bernanke is to save the Banks, hoping that inflation cures itself. But it looks like Bernanke is running out of excuses.

Comments

[mark van]

main street has been sold out by the fed,,,expect nothing from them,,,remember in july 1007 they denied any impact to the economy of the sub-prime melt-down...the fed just came out and said inflation will be at 1.5% by the end of the year...they lie and lie and lie...never trust government statistics and the fed is totally in wall streets pocket...