Central bank officials widely believe that public expectations about future inflation strongly affect the actual pace of price increases.
So central bankers try to manage expectations. One common way is to publicly set an inflation target, such as the Fed’s goal of 2%, and to talk a lot about the importance of hitting it and steps being taken to achieve it, as Fed officials do in frequent speeches, interviews and news conferences.
Problem is, by and large, the public isn’t paying much attention to what the officials say, diminishing their influence over inflation expectations, according to a new paper published by the National Bureau of Economic Research.
If central bankers, including those at the Federal Reserve, want to get the public’s attention, they are going to have to do a lot more on the communications front, says the paper, written by researchers from the University of Texas at Austin, the Auckland University of Technology School of Economics, and the University of California, Berkeley.
Policy makers at the world’s major central banks seek to keep inflation at or near 2% because they think that level reflects a healthy economy. And they generally believe inflation expectations can be self-fulfilling: Businesses that expect faster price increases raise their prices in anticipation, while workers who expect higher inflation demand higher wages, prompting businesses to raise prices to maintain margins, and so on.
Annual U.S. inflation has hit that target recently, after many years of undershooting it. Fed officials now want the public to expect inflation will stay close to 2% over a sustained period.
The paper observes, however, that while markets and economists respond to central bankers’ inflation comments, the general public—consumers and businesses—by and large just isn’t paying attention.
“Large policy-change announcements in the U.K., U.S. and eurozone seemed to have only limited effects on the beliefs of households and firms, despite widespread news coverage,” the paper says.
While the public’s indifference to central bank communications may reflect the fact that major economies have now had low inflation for many years, “it nonetheless presents a challenge for any policy maker that now seeks to break through this veil of inattention.”
Central bankers will need to get “explicit” about their desires, the paper says. “There is scope for new and improved communication strategies on the part of policy makers to use inflation expectations as a more direct policy tool for stabilization purposes,” the academics wrote.
The authors call for what they deemed a “layered” communications strategy, with messages tailored differently for markets and the broader public.
Central banks could “target their information treatments more precisely through social media, targeted ad campaigns, etc.,” the paper said. “Such a targeted strategy can help generate larger movements in expectations by identifying and concentrating on populations that are relatively less informed or whose expectations tend to respond more to new information.”
Write to Michael S. Derby at [email protected]