It is beginning to look like financial markets cannot handle more than three risks. First we have, as MacroScope reported earlier, Barclays Wealth worrying about U.S. consumers, euro zone debt and Asian overheating.
Markets are getting used to volatile swings in economic data since the financial crisis set in three years ago. But UK GDP figures for Q2 were so eye-poppingly strong they caused confusion on trading floors.
Greece’s decision to ask for help from its European Union partners and the International Monetary Fund has triggered a new wave of notes on where the country’s debt crisis stands and what will happen next. For the most part, they have managed to avoid groan-inducing headlines referencing marathons, tragedies, Hellas having no fury or even Big Fat Greek Defaults.
How high or low are the public’s expectations for future inflation? It depends on how you ask the question, according to New York Fed research.
The closely-watched Michigan Survey of Consumers asks questions about “prices in general” to measure expected and perceived inflation.
But New York Fed researchers found survey questions that use the word ‘prices’ instead of ‘inflation rate’ “may bias expectations upwards.”
Responses to questions about “prices in general,” were significantly higher than responses for “the rate of inflation” when asking for expectations of the next 12 months, they found.
Why? Questions that used the word ‘prices’ “focused respondents relatively more on personal price experiences and elicited expectations that were more strongly correlate to the expected price increases for food and transportation,” the researchers wrote.
The Federal Reserve keeps a close eye on inflation expectations, as they can become a self-fulfilling prophecy.
Read the full report here
The reality of ‘political economy’ is something that irritates many economists — the “purists”, if you like. The political element is impossible to model; it often flies in the face of textbook economics; and democratic decision-making and backroom horse trading can be notoriously difficult to predict and painfully slow. And political economy is all pervasive in 2010 — Barack Obama’s proposals to rein in the banks is rooted in public outrage; reading China’s monetary and currency policies is like Kremlinology; capital curbs being introduced in Brazil and elsewhere aim to prevent market overshoot; and British budgetary policies are becoming the political football ahead of this spring’s UK election. The list is long, the outcomes uncertain, the market risk high.