Inflation Cost Will Not Be Unnoticed

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Senior Member
Feb 19, 2021

Analysis: Fed hopes for inflation psych-out, stable expectations, as prices rise​

By Howard Schneider

WASHINGTON (Reuters) - The Federal Reserve’s mission is to maintain “stable prices,” but Chair Jerome Powell’s take on that may seem surprising: He doesn’t really care if people pay more for stuff.

FILE PHOTO: A customer counts his cash at the register while purchasing an item at a Best Buy store in Flushing, New York March 27, 2010. REUTERS/Jessica Rinaldi
Instead, Powell last week flagged a nuanced but critical shift in Fed strategy putting more weight on the psychology surrounding inflation and less on how prices actually behave.
The two influence each other, but new data touted by Fed policymakers shows just how set in stone public views of inflation have become - hugging close to their 2% target since the 1990s even as prices cavorted up and down.
Graphic: The Fed keys on inflation expectations -
Reuters Graphic
A new quarterly series, the Fed’s Index of Common Inflation Expectations, combines a range of survey and market data into one barometer of future inflation risk. Public expectations about future prices and earnings are central to how inflation actually behaves, and the index shows those expectations are both glacially slow to move and still low.

Insofar as expectations have moved in recent years, they have been drifting steadily lower, a trend that risked a difficult-to-reverse, Japan-style situation where prices, wages, and interest rates ratchet down together.

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