What We Think About the Economy Matters

[pennypinch]

What we think about what happens with the economy and inflation matters because it effects the decisions made by firms about wages and price-setting. If they believe inflation is on the rise, they will raise their prices. Those prices are passed on to consumers who then want higher wages. This is known as “wage-price” spiral in economics.
Currently, we believe inflation is on the rise. We believe it will go above 5% during the next year according to several surveys. Investors expectations are for it to be on the rise also according to treasury data.

Prices and expectations are rising now specifically because of higher costs for oil and other commodities. Firms (like Dow Chemical Co.) are raising prices to cover “staggering” energy cost increases. Consumers are feeling the heat at gas pumps (where gas now averages nearly $4 a gallon) and in grocery stores. But the classic “wage-price” spiral isn’t in place, because the economy is weak and unemployment is rising, so workers are reluctant to threaten their job security by asking for raises. In fact, average hourly earnings continue to lose steam.
Yet inflation is rising anyway. And once inflation expectations begin to take hold, it’s the Federal Reserve’s task to bat them down. “Price stability is our responsibility as central banks,” said Fed vice chairman Donald Kohn in 2005. “It is how, in the long run, we contribute to society’s welfare.”

The Wall Street Journal

“The public could mistakenly see the stance of policy as a sign that our commitment to long-term price stability has wavered,” Fed governor Kevin Warsh warned attendees at a luncheon last week in Washington, D.C. “Credibility could be undermined, threatening to create a persistent inflation problem that would have to be corrected, no doubt at great cost.”

Kelly Evans

Its no wonder we feel inflation is rising and that we feel the government is not doing enough to help. Where is the help? I haven't seen much help yet? If the stimulis program was all the help we are to get, I don't know what will happen. Most people I know who received a stimulis check spent in about one day trying to keep their utilities from being shut off. Where will that leave them this month and the next if this continues?

What We Think About the Economy Matters

[dollardaze]

I have to say that I can't see where the government is helping here either. The stimulus checks that are being sent out may buy a few extra groceries, pay a bill or two, but are not enough to stimulate the economy. They would have to have been sent out much sooner for that, sometime before we all felt the gas prices rise day after day and the grocery bill go up and up, and all the other costs go up so much. If it is indeed the government's job to slap these costs down, why isn't it being done?