The fate of financial markets may depend on central banks’ analysis of consumer “inflation expectations.” They risk venturing into Freudian pseudoscience more than sound psychology.
Inflation is running above 6% in the U.S. and could well go higher. After recent doubts, though, Western central banks have gone back to stressing the temporary factors driving the consumer-price index higher. Right now, investors seem to believe them: Stocks buckled under inflation fears earlier this week, but have since recovered. Bonds are pricing in very low interest rates for decades, despite a near-term rate rise.