Fighting Inflation Perceptions

Macro Perspectives

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We had a slew of Fed speakers yesterday - intended to keep us thinking about the prospects of even higher rates, which implies (they hope) expectations of less disposable income and higher unemployment.

With that being the intended takeaway, they hope the continued threat of higher rates, or even the current level of rates "for longer," is demand suppressing.  

This strategy of perception manipulation has been a key piece of the inflation fighting campaign.

Repetition has a powerful psychological effect. Remember, the Fed's mantra of "transitory" two years ago. "Transitory" is how they famously described the multi-decade high inflation that was clear and obvious to everyone. Despite the fact that that inflation was driven by textbook inflationary policy - an explosion in money supply.

Still, the drumbeat of "transitory" worked. Within a few months, a survey of fund managers showed that 70% thought inflation was temporary.

Now, the script, as we know, has since been flipped. The mantra is, and has been, "doing more" . . . "higher for longer" . . . "we have to keep at it."

Is it working?

It's working. Below, you can see what the Wall Street consensus view is on the economy (the blue line) compared to how the economy is actually tracking (the green line).

With all of this talk of driving inflation back down to 2%, come hell or high water, people believe it, and it affects behaviors. Despite an economy and inflation running well above trend (combining for near double-digit nominal GDP growth), inflation expectations remain (and have remained throughout the past two years) incredibly tame at just 2.4%.

So, inflation expectations are hovering around the average of the pre-pandemic decade, even though inflation is running multiples hotter, and we have over $5 trillion more sloshing around the economy.

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