Inflation Expectations Management

Inflation becomes dangerous when it enters expectations. That is when a temporary shock starts turning into persistent inflation. Inflation is not driven only by oil prices, tariffs, exchange rates, or supply disruptions. It is also driven by what households, firms, and workers believe will happen next. Once people expect inflation to stay high, behavior changes. Workers ask for higher wages. Firms raise prices faster. Consumers adjust spending. Inflation then starts feeding on itself. This is why keeping expectations anchored matters so much. Anchored expectations mean people still trust that inflation will return to target. When that trust weakens, inflation becomes much harder and much more costly to bring down. So how do policymakers keep expectations anchored? By acting early and credibly. By matching words with action. By communicating clearly and consistently. And by watching not only markets, but also households and firms, where wage and price decisions are actually made. Inflation expectations do not just describe the future. They help shape it. The real policy challenge is not only reducing inflation. It is preventing high inflation from becoming the public’s new baseline. Based on Coibion and Gorodnichenko’s NBER paper: https://lnkd.in/eUiTqjYp #Inflation #MonetaryPolicy #CentralBanking #Policy

I was great to talk to Rachel Wolfe from the The Wall Street Journal about the rapid rise of surcharges across the U.S. — and why, despite widespread frustration, consumers continue to pay them: https://lnkd.in/g-rQi7GJ A few observations: • Surcharges often appear at the final stage of a transaction — precisely when consumers are most attentive to the total price paid. • This timing makes them highly salient, even if they are not part of the posted price. • As a result, consumers may disproportionately internalize these fees when forming perceptions of price increases. This aligns closely with evidence from my research with Francesco D'Acunto and coauthors (https://lnkd.in/gQZ4-rmd): salient price changes play an outsized role in shaping inflation expectations. 👉 The key point is subtle but important: Even if surcharges are small in aggregate, they can feel large — because they are encountered at moments of peak attention. When consumers repeatedly observe unexpected add-ons at checkout, these experiences can accumulate into a perception that “everything is getting more expensive.” From a macroeconomic perspective, this has first-order implications: • Inflation expectations may become more sensitive to these salient, transaction-level price changes. • Perceived inflation can exceed measured inflation, especially when surcharges are widespread. • Expectations may react nonlinearly: a sequence of salient “price surprises” can trigger disproportionate upward revisions in beliefs. For monetary policy, this suggests an additional channel: Central banks are not only managing aggregate inflation — they need to manage the distribution and salience of price changes that households experience. In an environment where surcharges are pervasive, anchoring expectations may therefore require not just credible policy, but also an understanding of how consumers experience inflation in real time. In short: small, salient price add-ons can have outsized macroeconomic effects. Curious to hear how others think about the interaction between pricing strategies, salience, and inflation expectations. #inflationexpectations #surcharges #oilpriceshocks #supplyshocks #monetarypolicy #centralbanking #salience #purdue #esmt #inflation

Why isn't the Fed cutting interest rates despite recent improvements in inflation? The answer lies in something you can't see or touch: what Americans *think* inflation will be. In my latest piece, I explore how "inflation expectations" have become an animating concern at the Fed given the rollout of large tariff increases by the White House this spring. It's a big reason the Fed will stay on hold this week. The theory is elegantly simple and terrifyingly self-fulfilling: if everyone expects prices to rise, they do. Retailers raise prices preemptively. Workers demand bigger raises. Landlords hike rents. What makes this moment particularly fraught: Most current Fed officials have never managed a major inflation breakout. The last one ended when many were still in college. And unlike the decades before the pandemic, business management teams have gained experience recently using prices as a lever to manage margins. Some officials worry that the fluid, unpredictable rollout of trade policies could influence this psychological component to price stability. Another policy maker professes less concern. With the labor market cooling off, it's hard to see how consumers could act on their expectations of higher inflation by demanding bigger pay raises. The stakes couldn't be higher: Cut rates too soon and risk feeding higher price pressures beyond the expected one-time increases from tariffs. Wait too long and watch the labor market crumble. For the Fed, it's not just about the data—it's about what's in our heads. https://lnkd.in/eFsBhBuH