Monday, 20 February 2017

Rising Price Inflation Expectations A Drag on Consumer Spending?

The deputy-head of investments of a large fund manager recently posted this question on Linkedin: 
The second key thing to watch for the UK this year is inflation expectations. They have been steadily rising. How much of a drag will it bring to consumer spending and what implications does it have for Monetary Policy?
Here's Sean Corrigan's reply which speaks for itself: 
How can the 'expectation' of higher prices act as a 'drag' on spending? Is the whole point not that those who think prices will rise will tend to act to buy now in anticipation of the rise, so making their expectations partly self-fulfilling? Furthermore, except when supply is curtailed, how do prices in fact rise if people are not more avidly offering their money in exchange for goods -i.e., seeking to spend more aggressively? Finally, if you are suggesting some sort of counter-intuitive short-circuit DOES indeed take place, does this ipso facto not vitiate the ludicrous idea which has so infected policy-making, that expected price falls somehow cause spending to freeze?

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