Edward lambert at Angry Bear writes: “Inflation expectations, income expectations & financial repression”
The Federal Reserve Bank of San Francisco published a letter titled, Consumer Inflation Views in Three Countries, written by Bharat Trehan and Maura Lynch. The letter explores inflation expectations among consumers in the UK, US and Japan. Basically the story is that inflation expectations by consumers are tied to the level of oil prices and recent inflation. Policy adjustments by a central bank do not play much of a role in determining their inflation expectations.
The inflation expectations of consumers are important to evaluate the spending and wage demands of consumers. If consumers raise their inflation expectations, they would bargain for higher wages, only if they have power to do so. Labor has little power nowadays to bargain for better wages.
So what the letter from the FRBSF is missing is a comparison between what consumers expect of inflation and what they expect from their own incomes. Simply put, if I expect inflation to be 3%, but expect my own income to rise at around 0%, then I feel I am losing ground… and I will be less likely to spend money. Surely it makes more sense to spend money now since prices are rising faster than I can keep up with them, right? No… Spending more money now would make me feel even more insecure.
Solution: Give them reason to expect higher incomes going forward. Adopt an NGDP level target!
But EL goes ‘ballistic’ and proposes an increase in interest rates:
If the Fed was to raise their interest rate, the return on savings for consumers would go up, and consumers would feel a bit more empowered to spend. Of course, the government would have to pay more to service its debt, but consumers would feel secure to spend more. Thus, we see a form of financial repression at work which has the effect of suppressing consumer spending to the advantage of the government and owners of capital.