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Surprise, Surprise: Consumers Do Not Believe the Fed’s Inflation Projections

September 15, 2013 in Economics

By Joseph Salerno

University of Michigan Survey Research Center surveys consumers monthly.  The Index of Consumer Expectations is one of two indexes compiled from consumer answers to these questions.  One of the routine questions posed relates to expected inflation for next year and for 5 to 10 years from now.  Judging by the average response to this question recent consumers clearly do not believe that the Fed either is aiming at or is capable of hitting its announced inflation target of 2 percent.  For one year out, the index of inflation expectations has averaged 3.2 percent over the past year and 3.1 over the past 5 years.  Consumer expectations of long-term inflation are roughly the same, averaging 2.9  percent over the past year and 3.0 percent over the past 5 years.

Caroline Baum of Bloomberg addresses the question of why consumers have ignored the Fed’s widely ballyhooed inflation target of 2 percent  and the fact that CPI inflation has averaged only 1.5 percent over the past five years.   Her answer is enlightening:

Consumers either don’t listen, don’t care or derive their expectations from their own shopping cart. Food and gas comprise a big part of the household budget, and energy prices, at least, have been rising much faster than inflation. Just as consumers vote their pocketbook, they use their pocketbook to make judgments on where inflation is today and where prices are headed.

This is exactly correct.  In a classic passage written in 1949 (Human Action, pp. 23-24), Ludwig von Mises made this point and emphasized that consumers’ rough and ready assessments of the prevailing  inflation situation are just as “scientific” as the arbitrary statistical constructs contrived by government economists to “measure” inflation.  Wrote Mises:

The pretentious solemnity which statisticians and statistical bureaus display in computing indexes of purchasing power and cost of living is out of place.  These index numbers are at best rather crude and inaccurate illustrations of changes which have occurred.  In periods of slow alterations in the relation between the supply of and the demand for money they do not convey any information at all. In periods of inflation and consequently of sharp price changes they provide a rough image of events which every individual experiences in his daily life.  A judicious housewife knows much more about price changes as far as they affect her own household than the statistical averages can tell.  She has little use for computations disregarding changes both in quality and in the amount of goods which she …read more

Source: MISES INSTITUTE

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Help a Student Attend Mises University in 2014

September 15, 2013 in Economics

By Mises Updates

Thanks to our Donors, students who are accepted to Mises University may attend tuition-free.

To expand this opportunity for future Mises University students, we’ve developed this crowdfunding campaign. It’s an easy way to send your donation straight to Mises U.

Watch the video to learn more about why a donation to Mises University 2014 is one of the best ways to ensure the spread the ideas of the Austrian School and freedom:

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Source: MISES INSTITUTE