Welcome to European Tribune. It's gone a bit quiet around here these days, but it's still going.
Joe Blow doesn't really think about inflation when he's borrowing for a house.  He's thinking, "I like this house.  My monthly payment will be $xxx.xx, which I can/can't afford."  And he'll think about it in relation to rent if he's a renter.  Someone might point out to him, "Hey, Joe, inflation's going to be higher in the coming years, so, yeah, that's a good interest rate!"  But that's the extent of it.

People have inflation expectations, but Joe's only thinking, "Man, meat and cereal are costing me a lot more these days."  He thinks that will continue to be the case, watching the news.  But he's only going to adjust his budget gradually as he needs to.

The problem economists run into when they talk about consumers and firms is that they see all of these adjustments and assume people and businesses will handle them immediately.  That would be silly.  He/it might plan a bit ahead of the game, but he/it has no idea what, exactly, is going to happen.  Most of the adjustment is gradual.  Economists -- and, again, this really applies to economists of a certain persuasion -- take this fuzzy term, "expectations," and build automatic clearing of markets into things.  Granted, it's more a convenient assumption they make in cases where they're likely focusing on some other issues, but still: It's silly.

Welcome to the fight over sticky prices and wages.

Be nice to America. Or we'll bring democracy to your country.

by Drew J Jones (pedobear@pennstatefootball.com) on Fri May 9th, 2008 at 11:34:45 AM EST
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