Source: Screenshot of a video that was recently taken down off the Federal Reserve Bank of Cleveland Youtube channel.
Under this thesis, consumers’ current perception — or reality — is pretty bad. Public attitudes and outlook in early November registered at its lowest level in a decade — lower than at any point during the pandemic, according to the University of Michigan’s consumer sentiment index.
The survey attributed the drop to the “growing belief among consumers that no effective policies have yet been developed to reduce the damage from surging inflation.”
But what if there’s an “equally if not more plausible” alternative explanation for what caused inflation in the ‘70s, asks a recent paper by Fed researcher Jeremy Rudd. He opens with the line: “Mainstream economics is replete with ideas that ‘everyone knows’ to be true, but that are actually arrant nonsense.”
Rudd critiques the models and evidence that led to the “dubious” current theory and proposes that businesses and workers consider the recent past, not a future forecast, to determine their prices and wages. The potential danger that comes from not understanding what drives inflation under the current theory is that central bankers, businesses and policymakers might create policies based on forward-looking surveys and expectations under the guise they can control the economy and ignore the actual data.
“By telling policymakers that expected inflation is the ultimate determinant of inflation’s long-run trend, central-bank economists implicitly provide too much assurance that this claim is settled fact,” he writes. “[I]n some cases, the illusion of control is arguably more likely to cause problems than an actual lack of control.”
Whether or not you agree with Rudd, it is worth considering the implication of this paper when the next consumer sentiment survey comes out.
• Kiah Lau Haslett, managing editor of Bank Director