Don’t get us wrong — what you see below doesn’t mollify our concerns about the Federal Reserve’s explanation for why commodity price rises will moderate.
But, courtesy of the NY Fed’s new blog, these graphs do shed some light on how the doves on the FOMC think about inflation expectations:
As part of an experimental survey ongoing since 2006, the NY Fed discovered that the phrasing of the Reuters/University of Michigan survey of consumers — which asks about expected changes in the general price level — leads people to extrapolate too much from recent purchases they’ve made where prices have risen rather than projecting into the future whether prices will rise.
And at the moment, it seems that spiking gas prices are translating into an overly pessimistic view of inflation across other items, despite wage growth expectations remaining muted. The Fed’s view is that rising inflation expectations won’t translate into meaningful actual inflation unless businesses and consumers start acting on them, and expected growth in wages is a more likely precursor to this.
As we said, we don’t think the doves have managed an effective response to the question of why commodity price rises are likely to moderate, essentially just relying on futures markets to get it right.
But these charts give a sense of why they’re not (yet) too worried yet about the rise in inflation expectations this year in consumer sentiment surveys.
Related links:
Deflated inflation expectations – FT Alphaville
The qualifier in Yellen’s speech – FT Alphaville
Two more views on inflation expectations – FT Alphaville