Are inflation expectations irrelevant?

Well, on the inflation side, we've got a rather peculiar situation that essentially what's happened is since the pandemic, we've had four consecutive one-off inflation shocks.

So we start with the supply chain issues that come out of the pandemic.

Then we get the Russian invasion of Ukraine.

Then after that, we get the US tariffs.

And now we get the Gulf War.

And each of these creates sort of a unique situation.

impulse to prices in certain areas of the economy.

And that can create the impression of continuous inflation.

Now, we don't actually have that.

What we've got is four very specific and actually fairly narrow occurrences.

But it looks like inflation just never, ever goes away.

And that has contributed with a number of other things, I think, to the inflation expectations issue.

And people get very agitated about inflation expectations.

But actually, whilst inflation expectations have tended to be quite high, the important point is that they've not generally translated into action.

And that's the only time when inflation expectations matter.

So, for example, although consumers are saying, yes, prices are rising and they're going to keep rising forever and it's terrible...

What they're not actually doing is then successfully negotiating higher pay settlements.

And so you're not getting any second round effects coming from these inflation expectations.

Well, we'll talk a bit more about this action versus expectations in a moment.

But I think another thing which is really interesting, and this speaks to kind of a topic that we've covered from all kinds of different angles before, Paul, on this programme, is the role of...

the media and social media, in particular new channels over the last kind of decade, decade and a half, some of these expectations are being shaped or reshaped by the platform via which they're communicated.

And it's interesting, I think in the note you make this point that we shouldn't pretend, whether we're coming at this as an economist or as a journalist or as a policymaker indeed, that this hasn't had some impact.

It is important to say that, isn't it?

No, absolutely.

It's changed the way expectations are formulated.

Well, on the inflation side, we've got a rather peculiar situation that essentially what's happened is since the pandemic, we've had four consecutive one-off inflation shocks.

So we start with the supply chain issues that come out of the pandemic.

Then we get the Russian invasion of Ukraine.

Then after that, we get the US tariffs.

And now we get the Gulf War.

And each of these creates sort of a unique situation.

impulse to prices in certain areas of the economy.

And that can create the impression of continuous inflation.

Now, we don't actually have that.

What we've got is four very specific and actually fairly narrow occurrences.

But it looks like inflation just never, ever goes away.

And that has contributed with a number of other things, I think, to the inflation expectations issue.

And people get very agitated about inflation expectations.

But actually, whilst inflation expectations have tended to be quite high, the important point is that they've not generally translated into action.

And that's the only time when inflation expectations matter.

So, for example, although consumers are saying, yes, prices are rising and they're going to keep rising forever and it's terrible...

What they're not actually doing is then successfully negotiating higher pay settlements.

And so you're not getting any second round effects coming from these inflation expectations.

Well, we'll talk a bit more about this action versus expectations in a moment.

But I think another thing which is really interesting, and this speaks to kind of a topic that we've covered from all kinds of different angles before, Paul, on this programme, is the role of...

the media and social media, in particular new channels over the last kind of decade, decade and a half, some of these expectations are being shaped or reshaped by the platform via which they're communicated.

And it's interesting, I think in the note you make this point that we shouldn't pretend, whether we're coming at this as an economist or as a journalist or as a policymaker indeed, that this hasn't had some impact.

It is important to say that, isn't it?

No, absolutely.

It's changed the way expectations are formulated.