Inflation

 Who Is Right about Inflation?

When Powell and his colleagues consider consumer behavior, they assume that people have well-anchored views of inflation—that is, if the Fed sets a target of 2 percent inflation each year, the general public will act and spend accordingly. For example, if inflation is high for a quarter, a well-anchored public won’t change its spending habits much or at all because it has and maintains faith in the goal of 2 percent inflation.

In this view of the world, the Fed’s statements carry a lot of weight. If the bank suggests that inflation could outpace its target, consumers would worry about their spending power. They would make some large purchases sooner than they might have otherwise, which could open up options for the Fed. With interest rates at or near zero, a bump in spending would push the economy toward higher inflation, which would allow the Fed to raise interest rates and tap the brakes. In that scenario, the Fed recovers its ability to influence the economy through rate increases and decreases.

But research suggests that this view is incorrect, in part because Americans aren’t paying close attention to what the Fed does or says. University of Texas’s Olivier Coibion, University of California at Berkeley’s Yuriy Gorodnichenko, and Weber surveyed more than 20,000 Americans in 2018 and asked what they expected the Fed’s inflation goal to be. Fewer than 20 percent answered correctly, while a whopping 40 percent thought the Fed was targeting 10 percent inflation, more than five times the actual level. This “suggests a pervasive lack of knowledge on the part of households about the objectives of the Federal Reserve,” the researchers write.

The Americans in my area view inflation based on the price of gasoline and what they hear in the media.

Everyone bitches about gas prices and most blame Biden but very few (none?) are aware that the president has very little to do with gas prices.

Gas Price over the last ten years. Obama, Trump, Biden, gas prices go up and down. They'll go down again, they'll go up again. 

The constant media harping on scary-inflation over the last few months combined with the very real increase in gas, lumber, housing, and auto prices has convinced the people that big, bad inflation is here to stay. 

My view is,

• Current inflation numbers are mostly due to the 2020 COVID supply shock.
• Americans don't really understand inflation beyond what the media tell them.
• Much like the immigrant caravans, the scary inflation stories will disappear once they are no longer politically expedient.
• We won't know the real story for a year or so.