Rising Inflation Expectations: Why Macro Economists Can’t See It Coming

This is an example why macro-models used by mainstream experts don’t get it.

From the Wall Street Journal Blog (bold emphasis mine)

The Federal Reserve expects higher price pressures to be “transitory.” But other economic players aren’t so sure.

A new survey of finance professionals done by J.P. Morgan shows core inflation expectations are rising around the world.

In the U.S. specifically, the mean response is that core inflation, as measured by the consumer price index excluding food and energy, will be running 1.8% a year from now. That is up from 1.4% when the survey was last done in November and up from February’s actual reading of 1.1%. The survey polled about 750 respondents, with about 40% from North America.

The report notes the recent jump in oil prices and the longer-running increase in commodity prices may be skewing responses. But the report notes core inflation rates have already been rising in the U.S. and the U.K.

Duh?!

Core inflation expectations have long been rising around the world! Don’t these experts see that the REVOLTS in the Middle East have partly been triggered by record food prices??!!!

Chart from Business Insider

Next, price pressures are “transitory”???!!!

The IMF even says that people should get used to high food prices for all other reasons except macroeconomic government policies. The IMF is part of mainstream macro.

From the Bloomberg,

Consumers should get used to paying more for food, after prices rose to a record, because farmers will take years to expand production enough to meet demand and drive down costs, the International Monetary Fund said.

People in developing countries are becoming richer and eating more meat and dairy, meaning more grain for livestock feed and land for grazing animals, Thomas Helbling, an adviser for the IMF’s research department, and economist Shaun Roache wrote in an article. Rising demand for biofuels and bad weather also tightened supply, they said.

“Rising food prices may be here to stay,” Helbling and Roache wrote in the article published in the agency’s Finance & Development magazine. “The main reasons for rising demand for food reflect structural changes in the global economy that will not be reversed.”

True, food prices signify a minor component in the household expenditure pie for developed economies. But that doesn’t mean that rising oil, food and commodity prices won’t spillover to the rest of the economy. Eventually they will!

Chart from Northern Trust

When models try to isolate variables from people’s action (like isolating food and energy from inflation index as shown above-right window), then experts tend to underestimate real social activities, like inflation.

People do not act based on one or two or select variables. Our actions are bundled, as I previously wrote

We cannot isolate one variable from the other. People’s actions are responses to an ever dynamic “bundled” environment shaped by laws, markets, culture, environment, etc...

Bottom line: macroeconomics tends to deal with superficial issues that are bottled up in laboratory environment models rather than lay blame on what truly causes CPI inflation—inflationism (low interest rates and money printing) and interventionism (price controls, subsidies and etc..).