The latest survey from the Bank of England has inflation expectations among the public up again. But just because that’s what we think, it doesn’t mean it will come to pass. Crowds can get it wrong.
The audience nearly always gets it right. In that TV programme ‘Who wants to be a millionaire’ the audience is invariably right. You can understand why; if only 5 per cent of those in the studio know the right answer, and the rest have no idea, then the voting pattern should favour the right answer. The only time when this doesn’t apply is when it is one of those questions when the answer is different from what you would expect, or when hardly anyone knows the right answer.
So crowds can have a certain amount of wisdom.
But they don’t always get it right. Crowds can be mad too.
We are, alas, all too easily influenced by others. Patty Hearst became a convert to the cause of her kidnappers; we are all rather inclined to swim with the latest tide of irrational exuberance, even if that tide is really taking the economy hostage.
So when dotcoms boomed, not many said this has gone too far. In part, of course, this was because the Internet was really a good idea – people; people instinctively understood this. It is just that in the late 1990s, the wrong type of business plans were gaining traction.
Crowds can get it wrong. That’s why countries can get involved in wars that are doomed to end in failure, and yet the government secures popular support.
The madness of crowds was surely behind the recent property boom.
Then there’s inflation. According to the latest Bank of England survey, most of us think inflation is higher than it really is. Asked to give the current rate of inflation, respondents gave a median answer of 5.4 per cent, a series high and compared with 4.9 per cent in May 2008, the previous series high.
Median expectations are for inflation to hit 4.4 per cent over the coming year.
When projecting inflation, what the public think is important. If the public think it is higher than it really is, and expect prices to rise, they are more likely to go out and spend sooner rather than later, before prices go up. This in turn increases demand, and pushes prices up: expectations can cause to happen the very thing that was expected.
High inflation expectations can also push up demand for wage increases – which can also create inflation.
But that does not mean it will be like that this time. People may think prices will go up, but they are not going out and spending all the quicker, because they can’t afford to.
Public sector workers may be restless, but most of us dare not demand big wage increases – the job market is too fragile. In that environment, public sector workers demanding pay rises are less likely to garner much support from the Great British Public.
The Bank of England survey also found that by a margin of 76 per cent to 3 per cent, survey respondents believed that the economy would end up weaker rather than stronger if prices started to rise faster. This margin was the widest since the survey began in November 1999. So, unlike in the 1970s when we suffered from the winter of discontent, there is a realization that inflation is bad, that it must be beaten, and those who press for wage rises may well find themselves swimming against the tide of opinion.
The public may think inflation is higher than it is, and may expect inflation to be around 4.4 per cent over the year, but that doesn’t mean they are right. Crowds can get it wrong.
The public see the battle against inflation as one that must be won – sometimes crowds get it right.
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