Confidence in central banks takes a hit
Credibility with the public reduces the economic cost of controlling inflation
Inflation expectations are difficult to measure, but they are hugely important to central banks because they speak to the credibility of policy-makers, in that expectations act as an anchor for actual inflation in standard models of consumer prices.
A key risk for central banks is that persistently high inflation feeds into higher inflation expectations, thereby entrenching high inflation and serving as a trigger for significantly higher interest rates, which is what happened in the 1970s/1980s.
So far, measures of expectations across the advanced economies show a rough split between market/economist expectations remaining broadly consistent with central bank inflation targets and households/businesses reporting higher inflation expectations.
On the latter point, there is some noise in the short-term measures of household/business expectations stemming from the volatility in energy and food prices that is outside the control of central banks, and medium-/long-term measures of household/business expectations have been better behaved.
With credibility reducing the economic cost of controlling inflation, policy-makers also look at broader survey measures of credibility, which are much rarer and less timely.
In this respect, the survey that has recently received the most attention is the Gallup survey that shows public confidence in the Federal Reserve is at its lowest point since polling began in 2001.
Central bankers would probably believe that this finding is echoed across the advanced economies based on widespread media criticism of higher interest rates and it would make them question whether household/business inflation expectations are actually a bit worse than surveyed.
The drop in confidence would also, at the margin, lead some central banks to speculate on the slim possibility of more government criticism/intervention regarding monetary policy, where policy independence is a relatively new phenomenon in the history of central banking (for example, closer to home, the RBA's independence since the early/mid 1990s followed decades of government control).
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Based in Sydney, Kieran Davies is Chief Macro Strategist at Coolabah Capital Investments, an asset manager with 40 executives and over $8 billion in fixed-income strategies. Kieran is responsible for macroeconomic research and investment strategy, contributing to the investment decisions of the firm. Kieran has long experience as a macroeconomist in both the private and public sectors. He has worked most recently as Chief Markets Economist for National Australia Bank and was previously Chief Economist, Australia and New Zealand, for Barclays Bank and ABN Amro Bank/RBS. Kieran also worked as Principal Adviser on the macroeconomy and budget policy in the Commonwealth Treasury and Director of Forecasting.
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Based in Sydney, Kieran Davies is Chief Macro Strategist at Coolabah Capital Investments, an asset manager with 40 executives and over $8 billion in fixed-income strategies. Kieran is responsible for macroeconomic research and investment strategy,...
Based in Sydney, Kieran Davies is Chief Macro Strategist at Coolabah Capital Investments, an asset manager with 40 executives and over $8 billion in fixed-income strategies. Kieran is responsible for macroeconomic research and investment strategy,...
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