Saturday, November 28, 2009

Anchored inflation expectations

Antonio Fatas sees the strongly coupled inflation trends in the emerging and developed economies since 1996 as a "reflection of the strong anchoring of inflation expectations". Interestingly, inflation has remained tightly under control despite a few instances of major economic and finacnial market shocks.

Given the fact that the immediate history will surely exert a powerful influence in forming inflation expectations, it will require a shock of extraordinary proportions to break out of the anchored expectations. And with every passing day, as the green shoots of recovery takes hold (albeit ever so slowly), and the financial markets get back to normalcy, the extraordinary circumstances required for anchored expectations to get disengaged will recede faster into the pages of history. And this may a silverlining of hope for the world economy.

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