How inflation expectations affect the economy
The Fed's dual mandate of managing unemployment and inflation is often likened to steering a ship on the high seas: huge economy, tough conditions, limited control. And usually, one of the things making it easier is its predictable two percent inflation target, which anchors consumers' and businesses' inflation expectations. (Pun intended.)
Recently, though, that anchor has seemed less ... anchored. That can become a self-fulfilling prophecy — when people's inflation expectations rise, actual inflation soon follows. Today, we board a pirate ship to find out why, and how to fix it.
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