real terms and they want to compensate. Companies start passing on prices to their final consumer without any hesitation whatsoever. And then wage earners start requesting higher wages. That's exactly what has been playing out. Phase three is the most dangerous one. It is when the expectation formation is not just adaptive, you're not just trying to compensate for past inflation, but becomes anticipatory. You start wanting to compensate for future inflation. At its extreme, and I'm not saying we're going anywhere near that, we are not. We're not going back to the levels of the 70s, even though we are following the dynamics of the 70s. At its extreme, it becomes hyperinflation. Now, the Federal Reserve cannot deal with the first shock, but it can deal with what happens thereafter. This Fed had the wrong framework, part one of the mistake, got stuck in a transitory characterization of inflation, part two of the mistake, and part three, it failed to move when it could move. You can go (26/43)
You are viewing a single comment's thread from: