Goldilocks economy 20203/31/2023 ![]() ![]() “Decreasing inflation expectations,” Ball said, “are unambiguously good for the inflation fight.” In Brazil in the 1980s, when inflation was rising 20% a month, hours-long lines at grocery stores would form at the start of the month as shoppers sought to spend their money before prices shot higher by the end of the month. Laurence Ball, an economist at John Hopkins University, noted that in countries with hyperinflation, expectations can completely distort behavior. But I think now people don’t have in mind that things are going to be a lot more expensive next year.” “And so then I’m willing to pay much higher prices. “If I think prices are going to go up in the future, I think, well, this looks expensive, but I better get it now because it’ll be more expensive tomorrow,” said Laura Veldkamp, a finance professor at Columbia Business School. inflation soared well into the double-digits, expectations for inflation one year ahead peaked at 10.4%, according to a separate survey by the University of Michigan. Still, that’s down from a peak of 6.8% last June.īy contrast, in January 1980, when U.S. Shorter-term inflation expectations are higher: The median consumer expects inflation of 5% in a year. That’s far below the current inflation rate of 6.4%. In that way, rising inflation expectations can turn high prices from a temporary disruption, like an oil supply crunch, into something longer-lasting.īut lower inflation expectations can reverse that dynamic and help cool inflation.Ī survey by the New York Federal Reserve Bank earlier this week found that the typical consumer expects inflation to be just 2.7% in three years, down from 4.2% in the fall of 2021 and barely above the level in January 2020. Businesses then often charge their customers more to offset their higher labor costs, further fueling inflation. Lower inflation expectations matter because they can become self-perpetuating: When people expect inflation to stay high, they typically demand and receive higher pay. One reason is that consumers are continuing to spend - just not at breakneck speed. Nearly three years after the pandemic caused a brief but brutal recession and then a powerful rebound, the economy appears to have entered a phase in which growth might not be so forceful as to fuel high inflation. Things are not in the boom phase, but neither have they collapsed.” “It’s not too hot but not too cold, especially for retail. “The economy is in the middling phase,” said Neil Saunders, managing director of GlobalData Retail. As inflation eased, the Fed would be able to curtail its rate hikes, making a recession less likely. If the combination lasts, it could make it easier for the Federal Reserve to tame inflation without derailing the economy. That confidence could lead them to moderate their spending habits and wage demands, which would help slow inflation over time. Defying high inflation and sharp interest rate hikes, Americans keep spending - a trend that, if sustained, could keep the economy humming just enough to help avoid a much-predicted recession.Īt the same time, surveys show that consumers on average don’t expect today’s still-high inflation to last for very long.
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