New study – measuring inflation expectations doesn’t give useful information

At a Chicago Business School US Monetary Policy Forum yesterday, a group of economists pointed out that if Central Bankers are setting interest rates on the basis of market and consumer expectations of inflation rates (and most, including the Fed and the Bank of England pay close attention to such surveys), they are in danger of underestimating the risks of a return to volatile inflation rates. The report, Understanding the Evolving Inflation Process, states that “neither survey nor other measures of inflation expectations provide useful forecasts of the estimated trend in U.S. core CPI inflation since the Inflation Stabilisation two decades ago”. Fed Chairman Ben Bernanke obviously disagrees – he said last month that a “significant factor influencing medium-term trends in inflation is the public’s expectations of inflation”, but the group of economists believe that nowadays expectations follow, rather than lead, actual inflation. As a result there is a risk that there will be no early warning signal from the carefully followed survey data, and inflation may accelerate. The economists say that Central Bankers will need to be “more vigilant”. All good bond vigilantes agree.