Holding expectations low will help the battle against high prices.
I love grocery shopping, but others hate grocery shopping with me. I like to take my time going through each aisle, developing recipe ideas. I’ll often double back to get ingredients, or to reshelve items after I have changed my mind. I always start with a list, but I rarely stick to it. Anyone who dares to accompany me quickly grows frustrated with my supermarket ADHD.
For the past three years, there has been another method to my supermarket madness. Food prices have skyrocketed: while there has been some moderation of late, groceries in the U.S. are still 25% more expensive than they were prior to the pandemic. It’s gotten to the point where I expect more markups every time I shop, and I feel I have to scour the shelves even harder to stay within budget.
The anticipation of higher prices can be very dangerous for an economy, as those expectations can become self-fulfilling. Fortunately, inflation expectations have remained reasonably well-behaved in spite of the price level surges we’ve endured over the past two years. This is an especially fortunate outcome for central banks around the world.
Economists have long feared rising inflation expectations. When we anticipate higher prices, the theory goes, our demands for wages to keep pace with costs of living can lead our employers to charge more for goods and services. The desire to avoid that kind of feedback loop has informed monetary policy for several decades.
Measuring inflation expectations is far from a precise science. Indications can be taken from the financial markets: comparing yields on fixed rate and inflation-protected bonds produces an implied forecast for inflation over a given period of time. A number of countries also take surveys of inflation expectations, asking respondents how they believe prices will evolve over different terms.