A historic economic crisis has left Americans with plenty of things to worry about. But is inflation one of them? And is there a risk that fretting over higher prices may actually bring them about?
The answers to these questions will help define the timing of the Federal Reserve’s pullback from an unprecedented level of monetary stimulus, deployed to combat the worst financial panic since the Great Depression.
In justifying its pledge to leave interest rates near zero for the foreseeable future, the Fed takes comfort in inflation expectations, which policymakers deem comfortably restrained.
On the surface, that appears true. The most recent Reuters/University of Michigan consumer survey showed a 0.2 percentage point decline in expected inflation one-year out, to 2.5 percent. Market-based barometers have fluttered higher, though not alarmingly so.
Yet beneath the weak economic backdrop keeping prices in check, economists and consumers are increasingly uneasy about the prospect of a continuous loss of purchasing power — the very definition of inflation.
“We have the most potentially inflationary policy I have ever observed in a developed country,” said Alan Meltzer, a Fed historian and professor of political economy at the Carnegie Mellon Tepper School of Business in Pittsburgh.
According to widely used economic models, the way consumers perceive the prospect of future inflation has clear implications for prices themselves. Once higher costs are taken for granted, they are more easily tolerated.
Several indicators are already hinting at that possibility. Hard money training.
Tags: americans might, fed, inflation, interest rates, purchasing power
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