|
Central banks should give less weight to inflation expectations reported by consumers and companies and focus more on financial-market expectations when setting policy, as expectations matter only when they translate into actual economic behaviour, UBS Chief Economist Paul Donovan said in a report.
Donovan said inflation expectations have become more extreme and less grounded in reality in the social media era, making survey-based measures less useful unless they lead people, businesses or investors to change their actions. Expectations without the power or will to act on those expectations are largely irrelevant, he said. The report said consumer expectations can influence inflation if workers have enough bargaining power to seek higher wages or if households bring forward spending because they expect prices to rise. However, UBS said neither appears strong enough currently to create significant additional inflation pressure. In the US, higher inflation expectations are unlikely to drive a meaningful acceleration in wage growth in 2026 because most workers have less pay bargaining power than during the 2022 inflation episode, the report said. Consumers are also not accelerating purchases in anticipation of higher prices, while real personal consumption growth is not rising above trend. Companies' expectations can matter when businesses change production methods, raise prices in anticipation of higher costs or use their pricing power to expand margins. However, Donovan said expectations become economically significant only when companies have the ability to act on them. Investors, meanwhile, are more important for policymakers because they can act on inflation expectations quickly. If investors expect higher inflation, they may demand greater compensation for holding bonds, raising borrowing costs across the economy. The report said this effect can extend beyond government debt to corporate borrowing and bank financing. A gap between inflation expectations held by investors and those held by borrowers can increase the real cost of capital and discourage investment, it said. Donovan also flagged the role of social media in shaping perceptions, noting that prices of frequently purchased items such as food and fuel can have a disproportionate influence on consumer expectations. In the US, almost 30 per cent of survey respondents recently claimed to expect inflation above 15 per cent, although consumer price inflation has never exceeded 15 per cent since 1978. UBS further said policymakers should assess whether inflation expectations are translating into economic activity rather than treating expectations as an objective in themselves. For now, central bankers should probably disregard the inflation expectations of consumer and corporate surveys, and focus specifically on financial market expectations when thinking about policy setting, the report said. (ANI)
|
