Magazine article Economic Trends

Inflation Expectations

Magazine article Economic Trends

Inflation Expectations

Article excerpt

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01.10.07

Keeping inflation expectations "contained" seems to be an important preoccupation for central bankers. This is because the expectation of higher inflation induces changes in economic behavior that impose costs on the economy, which, over time, are detrimental to long-term prosperity. For example, when people anticipate an increase in inflation--and the corresponding decline in the purchasing power of their money--they are more likely to invest their wealth in real assets, such as land or commodities. This reallocation is a less efficient use of resources than what may have occured if people didn't have to seek this inflation-protected form of saving. Rising inflation expectations may also help to perpetuate an otherwise temporary rise in prices, making the job of maintaining price stability more difficult to achieve.

To gauge inflation expectations, economists turn to a number of sources, including surveys of consumers, financial market data, and economists' predictions. A recent look at each of these sources shows inflation expectations are running anywhere from 1 to 3-1/2 percent, depending on the source and the period over which inflation expectations are projected (1 to 10 years).

Consumers' year-ahead inflation expectations were elevated in the wake of Hurricane Katrina and geopolitical issues that drove up the price of oil through last summer but have since tumbled downward. …

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