Thread by @DianeSwonk

This issue came up during the @KansasCityFed Jackson Hole Symposium last week. Many economists have studied the outsized role that changes in the things people buy most often play in the gap in inflation expectations between households and central bankers and economists.

https://twitter.com/nytimesbusiness/status/1301104336127307776

Much of the focus is on food and gas prices. They are purchased often enough to observe price shifts. Problem occurs when we are in a pandemic which has limited purchases to few goods and triggered hoarding and supply shocks that boost those prices.

Worse yet, they are boosting prices as wages are falling/disappearing - especially now that supplements to UI have lapsed. Add surging PPE costs and there is good reason to believe that inflation is a different animal, at least for now, than what we typically measure.

Problem is that measured inflation does not capture the impact such shifts have on our expectations. There are efforts underway to better measure actual inflation for households by central banks but those still fall short in dealing with the impact inequality has on perceptions.

Why do we care? Because the @federalreserve is adopting an explicit change in its *forward guidance* that says it will allow for some overshoot on inflation to allow for a catch up in employment and wage gains. This something I wholly support.

The Fed is essentially admitting it past mistakes by saying it will no longer preempt inflation to allow unemployment to fall further and wages to accelerate for more workers before it raised rates. Problem is doing that when too many people already expect higher inflation.

Risk is that a policy that is focused on *overshooting* on inflation could backfire in such a environment. We can’t afford that. Solution is for the Fed to talk more about goal to generating more inclusive jobs and wage gains than inflation.

The Fed has begun to do just that but I fear that it still has a long way to go to make its intent clear. Indeed, if the Fed was more clear, we would likely see a bit less buoyancy in the overall stock indices as its implicit goal is to level the playing field a bit for workers.