Is inflation higher than central banks think?

Is inflation higher than central banks think?
By Claire Jones
Jan 23 2020
https://ftalphaville.ft.com/2020/01/22/1579703598000/Is-inflation-is-higher-than-central-banks-think-/

There’s an interesting paper out from the University of Essex looking at whether the public actually listen to central bankers.

This listening matters for monetary policymakers because central banks often justify their inflation targets by saying it gives them an easy-to-communicate goal to the public. This in turn, they claim, helps expectations adjust to the desired slow-but-steady inflation and the target becomes credible and self fulfilling. 

There’s much in the paper, Central Bank Announcements: Big News for Little People?, to worry policymakers, then. Notably that most people are not paying attention to what the most powerful group of central bankers in the world, the US Federal Reserve’s Federal Open Markets Committee, or FOMC, say: 

Our main finding is that FOMC announcements have little measurable effect on consumers’ perceptions and expectations of inflation and interest rates.

What we want to draw attention to now though is something that we’ve noticed elsewhere — and is, we would suggest, a facet of the public having their mind on things other than central banking. That is, that people think inflation is much higher than the measures central bankers rely on tell us it is. 

Those polled by the paper’s authors, for instance, say they think inflation is a whopping 5 per cent:

For reference, the measure the Fed uses, the Bureau of Economic Analysis’ PCE, puts inflation in the year to November at 1.5 per cent. The Fed targets inflation of 2 per cent. 

Nor is this an issue confined to the US. 

Benoît Cœuré used his farewell address at the European Central Bank to warn that people in the eurozone think inflation’s been averaging 9 per cent a year. The measure the ECB looks at, HICP compiled by Eurostat, the European Commission’s statistics agency, has averaged 1.6 per cent over the period in question. 

As the FT’s Frankfurt Bureau Chief Martin Arnold writes here, the odd German is even thinking of moving to South America — not the most obvious haven for those that want to escape the clutches of high inflation — to avoid what many view as steep rises in the cost of living. 

Ask anyone at the European Central Bank’s headquarters 20 miles away in Frankfurt about inflation and they are likely to express frustration at its persistently low level. Yet at the Mainz farmers’ market, many people think the opposite. 

Prices shot up in shops and restaurants when the euro replaced the Deutsche Mark in 2002, said Ludwig Kloster, a baker from the nearby town of Bad Kreuznach, adding: “The cost of living is still going up.” He aims to retire to Latin America, where “things cost half as much”.

It’s the same in the UK too, with polls showing the public believes inflation is twice as high as the Bank of England’s preferred reading does. 

So what on earth is going on?

[snip]

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