Boston Fed Warns Rising Inflation Expectations May Not Drive Higher Spending

        By Michael S. Derby
        It's an axiom of modern monetary policy making that if you want to get consumers to spend a little more, convince them higher inflation is coming their way.
        As Federal Reserve officials see it, fears of an item's price rising in the future may make a person more inclined to buy it today.
        But that view may be wrong. Researchers at the Boston Fed argue in new research that a rise in inflation expectations doesn't do much to induce households to spend more on bigger ticket items. "Promoting higher inflation expectations may be insufficient for boosting present consumption, and in some case higher inflation expectations may actually discourage consumption," write Boston Fed economists Mary Burke and Ali Ozdagli.
        The authors found that there are very small increases in spending due to an increase in inflation expectations, but not where they can matter most: on big-ticket items. The only expensive purchases that seems to respond to changes in expectations over future prices, the report says, are cars.
        The authors found that this effect seems to be consistent across income levels. "We do not observe stark or consistent differences in the response of spending to inflation expectations between different households grouped on the basis of factors such as owning stocks, having a retirement account, or owning a house," the report said.
        The apparent reason an expected rise in inflation doesn't translate into boosted spending is because consumers expect that higher future inflation will erode the real value of their spending power, the paper said.
        The paper's findings reflect the broader quandary the Fed is in right now. It's kept short-term rates near zero since 2008 and pledged to keep rates very low well into the future. It's engaged in multiple bond-buying campaigns all aimed at driving up growth. And yet, inflation has remained stubbornly low. Indeed, the Fed's preferred price gauge, the personal consumption expenditures price index, has been below the 2% goal for almost two years.
        The persistence of low inflation has come amid modest rates of economic growth. And while hiring has been picking up, the gains are also on the historically calm side of the ledger. The Fed's concern over inflation drove it last summer to officially state the importance of defending its inflation target from both the high and low side.
        Fed officials have been confident inflation will slowly rise back to 2% -- it's now at 1.1% -- slowly, but steadily. That said, the Boston Fed report suggests any Fed push to goose the economy forward through higher inflation expectations might be fruitless.
        "As a policy measure, raising inflation expectations may not be effective in boosting present consumption," the Boston Fed researchers said.
        (END) Dow Jones Newswires

        May 02, 2014 09:31 ET (13:31 GMT)