Inflation Expectations: From bad to worse

With the monthly release of the CPI the Cleveland Fed publishes it´s measure of inflation expectations. As the chart shows, over the past two years and even over the last six months inflation expectations are “shrinking”. And that´s very bad news!

For a discussion on the Cleveland Fed measure of inflation expectations see here.

3 thoughts on “Inflation Expectations: From bad to worse

  1. Pingback: pictures of the depression « Irvington Parents Forum

  2. David – market monetarists cannot have it both ways without losing any pretence at intellectual coherence.

    They cannot on the one hand say that the collapse in TIPS breakeven spread post July 2008 reflected imminent and realistic fears of a depression and that the move in prices reflected real expectations rather than an increased risk premium due to temporary supply/demand imbalance; and on the other depend on a model (the one that underlies the Fed paper) that suggests this move in breakevens was a mere cheapening of an illiquid product under a distressed scenario where liquidations abounded.

    If you believe the Cleveland Fed paper, you must admit that the situation post July 2008 was not nearly as bad as one would expect solely based on the move in breakevens. On the other hand if you emphasize the breakeven move, you must think there is something wrong with the Fed approach.

    Furthermore, since deflation is only really a risk to the extent it impinges on either nominal wage growth or nominal asset pricing, shouldn’t you rather focus on direct measures of such? My sense has been that peoples expectations about wage growth in the US have stabilized and are starting to improve. Similarly stocks are not too far from their highs.

    So on what basis is it that you argue we ought imminently to fear the arrival of bad deflation?

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