Inflation Expectations Are Never 'Well Anchored'
Summary
- Saying inflation expectations are "well anchored" makes it sound like they can't easily change. The reality is people expect inflation about like the current inflation.
- Inflation can get into positive feedback loops that are very hard, or impossible, to control.
- The central banker needs to take a long-term view because inflation responds so slowly to their policy changes.
Jerome Powell keeps saying, "inflation expectations are well anchored". This "well anchored" makes it sound like they can't easily change.
The reality is people expect inflation about like the current inflation. As seen in the graph below, if the CPI (green line) goes up, as it has the last 4 months, people's expectations goes up too (blue line). For Powell to think it it safe to print money because people are not expecting much inflation at this moment is foolish. People's expectations can change in a month, but the "long and variable delays" from policy change to inflation change can take years.
(Source: FRED)
Inflation can get into positive feedback loops that are very hard, or impossible, to control. The central banker needs to take a long-term view because inflation responds so slowly to their policy changes. It is irresponsible to make decisions about money creation based on a short-term and fickle measure like people's expectations.
The reality is that people's expectations are never "well anchored". If we get CPI numbers of 6% or 7%, then inflation expectations will move to that range also. Maybe then Powell will stop saying, "inflation expectations are well anchored".
Editor's Note: The summary bullets for this article were chosen by Seeking Alpha editors.
