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Of Tempests and Anchors

Posted on March 03, 2008

Many a central banker believes that inflation expectations are a main determinant of inflation, i.e. that inflation is an expectations phenomenon. Consequently, they take much comfort from the fact that inflation expectations are much better anchored nowadays than they were some decades ago. As long as inflation expectations stay low, they argue, inflation will stay low.However, it might turn out to be a grave error to count on (hitherto) well-anchored inflation expectations to keep consumer price inflation in check. Why? Because inflation is primarily a monetary phenomenon. Inflation cannot...

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inflation