About that Runaway Inflation the Fed is Creating

I am having a hard time finding it when I look to inflation expectations. Here is the average annual expected inflation rate over the next five years implied the spread between nominal and real yields on treasury securities:

Note that most of the pick up in expected inflation occurs during October when Fed official were talking up QE2. Since then inflation expectations have not exploded but drifted around where they had been, around 1.6%. It is also worth noting in this figure that inflation expectations were steadily heading down for most of the year. QE2 has reversed that, but has yet to push inflation expectations up to the 2.0% value the Fed would like to see it. Contrary to the rhetoric, then, QE2 is not the great inflation creating machine some claim it is. And just to be clear, it is not inflation per se that the Fed or supporters of QE2 ultimately want. What they really want is to increase aggregate spending. Raising inflation expectations would do that as I explain here. If only the Fed would adopt a nominal GDP level target many of these problems would dissappear.

Disclaimer: This page contains affiliate links. If you choose to make a purchase after clicking a link, we may receive a commission at no additional cost to you. Thank you for your support!

About David Beckworth 240 Articles

Affiliation: Texas State University

David Beckworth is an assistant professor of economics at Texas State University in San Marcos, Texas.

Visit: Macro and Other Market Musings

Be the first to comment

Leave a Reply

Your email address will not be published.


*

This site uses Akismet to reduce spam. Learn how your comment data is processed.