Under these circumstances, inflation expectations are not a cause for concern.

With good communication policy, inflation expectations can be contained, and inflation can be brought down as quickly as necessary.

But that merely fuels inflation expectations and makes the task more painful.

The Fed has, however, succeeded in enhancing expectations of inflation in the US.

The second is that medium term inflation expectations no longer remain sufficiently well anchored.

Phelps key observation in macroeconomics was that the relationship between inflation and unemployment is affected by expectations, and since expectations themselves are endogenous they change over time so, too, will the relationship between unemployment and inflation.

If the BOJ were to succeed in raising inflation expectations, long term interest rates would necessarily have to reflect a correspondingly higher inflation premium.

And the reduction in real interest rates via a rise in expected inflation when open ended QE is implemented risks eventually stoking inflation expectations.

Nevertheless, their expansionary actions have helped to raise long term inflation expectations toward the target levels.

The fact is that around most of the world, inflation and eventually inflation expectations will keep climbing unless central banks start tightening their monetary policies.

Second, many (if not necessarily all) central banks will eventually figure out how to generate higher inflation expectations.

The traditional signals provided by inflation expectations, long term interest rates, and exchange rates have not started flashing.

Rather, the fear is that central banks will not see inflation coming until it is too late, and that this will cause a major upward shift in inflation expectations.

Higher rates would have meant lower inflation, so that inflationary expectations would not be the issue they have become.

Yet no likelihood of inflation can be seen when tracking price indexes or financial market readings of forecast expectations.

Eventually (once the slack in goods and labor markets is reduced), this would push inflation expectations and yield curves higher.

If a government attempts to push the unemployment rate too low, inflation will increase, and so, too, will inflationary expectations.

Even so, the fact that very high inflation is possible does not make it probable, so one should be cautious in arguing that higher gold prices are being driven by inflation expectations.

Ordinarily, a sharp rise in oil prices quickly translates into higher inflation expectations, followed by rising interest rates at all maturities.

If normal times call for a conservative central banker who helps to anchor inflation expectations, now is the rare time when we need a more unorthodox central banker who will fight deflation expectations.

For the past 25 years, the mantra of inflation targeting (introduced in my 1985 paper) has served as a mechanism for containing inflation expectations by reassuring the public of the central bank s intentions.

Monetarists hail the low inflation era as their great achievement. They take pride in the expert management of expectations by central banks.

It is nonsense to argue that central banks are impotent and completely unable to raise inflation expectations, no matter how hard they try.

Indeed, some countries are ditching their inflation targeting regime and moving into uncharted territory, where there may be no anchor for price expectations.

But what could take the place of the stable exchange rate as an anchor for monetary policy and for tying down inflation expectations?

But it cannot wait too long, lest inflation expectations drift to a dangerously high level, forcing the Fed to move aggressively and at the cost of considerable economic pain to wring inflation out of the system.

In most countries, at most times, inflation should be kept very low and central banks should anchor inflation expectations with a stable long term target, although the alternative of targeting nominal GDP deserves to be discussed.

As long as nominal interest rates are rising because of inflation expectations, the increase is part of the solution, not part of the problem.

As a practical matter, even controlling for expectations (as Phelps work insists that we do), the relationship between unemployment and inflation is highly unstable.

Such an approach would reduce the risk of debt deflation, while capping inflation expectations to prevent a damaging surge in prices as recovery takes hold.

Phelps work helped us to understand the complexity of the relationship between inflation and unemployment, and the important role that expectations can play in that relationship.

Likewise, the market for long term bonds indicates extremely low inflation expectations (of course, interest rates are higher in cases of perceived sovereign default or re denomination risk, such as in Southern Europe, but that has nothing to do with inflation).

The Fed has signaled that its federal funds rate will remain near 0 , at least as long as unemployment exceeds 6.5 and inflation expectations remain well anchored.

Installing a conservative central banker helps to keep inflation expectations in check, thereby holding down long term interest rates and mitigating upward pressure on wages and prices.

The BOJ would be right to worry, of course, if interest rates were rising because of a growing risk premium, rather than because of higher inflation expectations.

By signaling their intention to contain price pressures, they would alter inflation expectations and thus essentially convince the public and the government to do the heavy lifting.

Seminar expectations

For starters, unanchored inflation expectations and structural difficulties might mean that efforts to boost demand show up almost entirely in faster price growth and only minimally in higher employment.

But this history means that the true real long term interest rate was not as high in the 1980 s as our measures show, because long term inflation expectations must have been much higher than the one year inflation rate was at the time.

The best cure would be controlled higher inflation that is, the aforementioned temporary increase in the inflation target to erode the real value of public debt and forestall the risk of a much more damaging inflationary shock later, one in which expectations become unhinged.

Inflation!

Goals and expectations

With little wage inflation, high goods inflation is unlikely.

Prices in general, ...so inflation, you had 5x inflation.

Forget Inflation