Join our community of smart investors

Inflated fears

Any economist who quotes Dashiell Hammett, the crime writer who gave us The Maltese Falcon and The Thin Man, is worth taking seriously. Step forward Jeremy Rudd, an economist with the US central bank, who featured in last week’s Bearbull. “Nobody thinks clearly, no matter what they pretend,” he wrote, quoting Hammett. “That’s why people hang on so tight to their beliefs because, compared to the haphazard way they are arrived at, even the goofiest opinion seems wonderfully clear, sane and self-evident.”

As a contribution to a paper on, say, cognitive bias – a subject extremely relevant to investing – the Hammett quote would be spot on. In fact, the quote comes from a paper late last year about the effect on inflation of expectations for inflation. And nowhere, Rudd reckons, are the views of economists goofier than on the relationship between price changes and expectations for inflation.

For starters, Rudd questions the theoretical basis for even thinking that expectations should influence future inflation. That said, he does acknowledge Milton Friedman came close in suggesting that workers go into wage negotiations with the likely future inflation rate built into the basis for their claim (assuming, of course, that the future rate would be higher than the current rate). Meanwhile, employers do the opposite – focusing attention on the current rate.

To continue reading...
Join our Community of Smart Investors
  • Independent full-length company analysis
  • Actionable investment ideas and recommendations
  • Expert investment tools and data
  • Stock screens from Algy Hall
Have an account? Sign in