Morning Must-Read: Robert Waldmann: Anchored Perceived Inflation, or How Fox News Helped Obama

Robert Waldmann: Anchored Perceived Inflation, or How Fox News Helped Obama: “A huge recession, sluggish recovery and gigantic persistent output gap….

…Core PCE inflation… fell from sticking close to 2% to fluctuating in the range of 1% to 2%. The standard lowbrow backward-looking forecasting equation… completely failed…. There are two candidate explanations for this surprising behavior of inflation. One is that there is strong downward nominal rigidity…. Another quite different explanation is that expected future inflation has a very important role in wage and price setting and that inflation expectations are anchored…. The median respondent in the Michigan University/IPSOS Reuters survey persistently expected future inflation of almost exactly 3% in almost all surveys since mid 2009… in period after period a majority of survey participants have been surprised by actual inflation lower than their forecast. This is a new phenomenon…. [Perhaps,] like inflation expectations, inflation perceptions have delinked from reality…. I give the credit to Fox news…. People… [who] rely on Fox News… are out of touch with reality–their expectations and perceptions are what Roger Ailes wants them to be…. Fox News convinces people that inflation has been and will be high…. [Thus] actual inflation is low but positive. It fits the facts which I reported. You decide.