According to Gallup Americans are worried about inflation. Should economists be?


Inflation expectations play a role in just about every modern Monetarist or New Keynesian economic model. I am not sure what the Austrians have to say about them. However what counts as “expectations.” If its the man on the street the we should be worried if its the bond market then maybe not so much

FRED Graph

The inflation protected ten year treasury note is trading only 2.5 points below the unprotected note. Thus, indicating a market expectation of a 2.5% inflation rate over the next 8 years or so.

My thoughts on the matter are that its market prices that matter. The models may have consumer, worker and firm expectations but my view is that all expectations are made in the financial markets. Consumers buy when they can get credit. Workers work when they can find a job and firms hire when profits are rising and capital is easy to come by.

The typical person does not and does not need to, make long run expectations about economic variables.