After years of maintaining that inflation expectations were stable and solidly grounded, Fed policy makers are starting to recognize a small but worrying softening in the outlook that consumers, businesses and investors have for prices.
“They’re acknowledging that the inflationary anchor has slipped a bit,” said Ethan Harris, head of global economics research at Bank of America Merrill Lynch in New York.
That’s a concern because expectations shape how households and companies act and thus help determine where inflation actually ends up. Consumers accustomed to meager inflation will resist paying up for goods and services. Companies, in turn, will avoid handing out wage increases because they fear they won’t be able to raise prices to cover the added labor costs. It’s a vicious circle that can constrain the Fed from achieving its 2 percent inflation target.
“There is no single highly reliable measure” of longer-run inflation expectations, Fed