Central Banks

Goldman Sachs on another challenge for the US Federal Reserve in its battle to contain skyrocketing inflation:

  • Potential further increases in food and gas prices are the main upside risk to consumer inflation expectations.
  • But another key upside risk is the coming barrage of political advertisements highlighting high inflation ahead of the midterm elections in the next few months.
  • Inflation expectations have historically been quite sensitive to political outcomes, and voters report that inflation will be one of the main issues this fall.

GS argue that such a development would be a new one, not seen for many decades:

  • There is limited evidence available on the link between political ads and consumer inflation expectations because inflation has been tame and therefore not a significant campaign issue in recent decades. However, recent academic research suggests that a large share of the dispersion in inflation expectations is attributable to differences in available information, and that inflation expectations shift when new information is provided.

And, on what will the Fed do?

  • Fed officials might feel compelled to respond forcefully to even moderate further increases in long-run inflation expectations. As a result, we see the upcoming onslaught of inflation-focused political advertisements as adding to the risk that the Fed could continue to tighten aggressively even if economic activity decelerates sharply.

This might be easier than taming inflation in an election year:

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