And there’s a lot of research on what those might be. So there are behaviors that combat inflation and there are behaviors that contribute to inflation. Do people recognize that it’s bad now but expect it to fade with time? Or do they know that it’s bad now and think it’s going to stay bad forever and thus change their behavior? michael barbaroĪnd so what does it look like for all of us, the spending public, to start fulfilling the prophecy of inflation or to not fulfill the prophecy of inflation. The crucial distinction here is just like with a heartbreak where you have this short-term period where it’s clearly going to be bad, but your psychiatrist is hoping you don’t change your long-term behaviors, the crucial question here is, inflation is obviously bad. People behave in ways that make them economically single, to go back to this analogy. But it is not going to be here forever, and you should not change your behavior in ways that might lock it in. And I think very much like your therapist, in this case, Jay Powell, the Fed Chair, and all of his colleagues down at the Federal Reserve are trying to tell markets, investors, businesses, consumers right now that, yes, inflation is very painful. But it is going to end with time.Īnd you shouldn’t permanently alter your life in ways that make that bad outcome likely to continue.
Your therapist is likely to tell you, this is very painful right now. You’re fulfilling the prophecy of your unhappiness.
And you are more likely to actually find yourself in a situation where you, in fact, are heartbroken forever, because you’re just going to be sitting there fixating on this. You are not going to go out and see your friends, and you are not going to rejoin Hinge, or Tinder, or whatever your dating app of choice might be.
Your therapist is probably going to say to you, don’t act like that because if you act like you’re going to be heartbroken forever, you are going to mope around your apartment. And you tell your therapist, I am going to be heartbroken forever. We’ve just had a really bad breakup, and you go to your therapist. So I think it’s useful to take a step back and use an analogy here. So when we say a self-fulfilling prophecy, we mean the fact that people expect inflation to last might actually make it last. They are trying to prevent consumers from starting to think that inflation is going to last forever.Īnd the reason that they’re doing that is because if consumers become convinced that price increases like we’re seeing today are going to be a permanent feature of the economy, they might change their behaviors in ways that make that a self-fulfilling prophecy. But there’s also sort of a psychological goal to what they’re doing right now. So that’s what the Fed is doing right now. And when supply catches up to demand, prices moderate. Interest rates go up, spending goes down. And as a result, the thinking goes, they have less money to spend, which is supposed to help bring down prices. So people spend more money on car loans, on their credit card debt, on their mortgages. And as we’ve explained with you on the show in the past, as interest rates go up, borrowing money becomes more expensive. And so yesterday, we saw them make their second very big rate increase and their fourth increase this year as they carry out this fight against inflation. And the Federal Reserve is trying its very best to raise interest rates to sort of slow down consumer demand and bring that inflation under control. Jeanna, where exactly are we in what has become our long national nightmare of inflation? jeanna smialek
In doing so, one of its biggest goals is to prevent the expectation of higher prices from actually creating higher prices. To fight historic levels of inflation, the Federal Reserve on Wednesday once again used its most powerful weapon - raising interest rates. michael barbaroįrom The New York Times I’m Michael Barbaro. Please review the episode audio before quoting from this transcript and email with any questions. While it has been reviewed by human transcribers, it may contain errors. This transcript was created using speech recognition software. Transcript How Expecting Inflation Can Actually Create More Inflation By raising interest rates, the Federal Reserve hopes to prevent consumers from believing higher prices will last forever.
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