Tuesday, March 8, 2011

Inflationary expectations are irrelevant.

In trying to predict inflation in the near future, the important factors to consider are current wage increases, current raw material price increases and current factory gate price increases.

Expectations are irrelevant, except in that they influence the above three factors. For example, inflationary expectations seem to have risen in the U.K. recently, but this does NOT seem to have led to a faster pace of wage increases. At least not according to the evidence that I’ve found – see here, here and here.

What seems to be happening (at least to some extent) is that the average Brit has read or heard that prices are rising a bit faster than a year ago, and thus “expects” the trend to continue for several months or a year or two. But at the same time, the average Brit is not pushing hard for significant wage increases.

Indeed, this has been going on for several years now. That is, real wages have not increased for the last five years or so, thus employees for that period have quite clearly not been pushing for “inflation plus X%” wage increases, which is what they pushed for during the serious bout of inflation in the 1970s.

In short, expectations are irrelevant.

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