Prices across G7 nations are rising by more than 9% year over year, yet even though salaries have increased in many economies; they are simply not keeping pace with rising prices. The 9% figure is the highest rate of inflation increase since the 1980s. What is even more worrisome is that the public is starting to expect high inflation, which means companies are not so bullish about long-term spending habits. When coupled with the Federal Reserve’s decision to raise interest rates by .75%, this caused the markets to tumble. But moves like these are critical if central banks are going to convince people that they will get inflation under control, which seems like an uphill battle, if not a Sisyphean task.
Great Expectations
Many experts and professional forecasters of financial markets believe that inflation will stay close to the Fed’s target of 2%. American consumers, however, increasingly do not believe this, and instead expect prices to shoot up by more than 5% in the coming twelve months. In May 2021, someone in a rich country thought inflation over the next year would be 2.3%; they are not expecting 4.2%! Many firms expect even higher numbers. Central banks have a conundrum; they need to convince people that inflation will slow, but the problem is that pretty much the only people listening to them are investors and financial journalists. In 2010, researchers at the Bank of Italy surveyed people to see how much they knew about inflation. Half of the respondents had a pretty poor understanding. Similarly, in Japan, which has implemented a long-term, powerful monetary easing to boost inflation, 40% of those surveyed had no clue that the plan even existed.
A Vicious Cycle
This public apathy regarding macroeconomic issues did not matter much until recently. But like many things, the pandemic signalled a paradigm shift. Huge increases in consumer expectations about inflation could become part of wages and prices, which will assuredly push inflation even higher. Moreover, tactics that have been used, such as interest rate hikes, may not have the desired effects. Experts do say there may be ways out. One way is to follow India’s lead and make surprise announcements about monetary policy. In May, the country’s central bank raised interest rates outside of its typical meeting schedule. Another way is to make public statements in ways that resonate with the public. In 2012, the European Central Bank promised to do “whatever it takes” to save the euro. Instead of focussing on the mechanism of saving the euro, which was via bond purchases, what resonated with non-experts was the “save the euro” language. At some point, it is becoming clearer and clearer that we need things to be dumbed down for us.