Inflation Expectations Could Be a Freudian Slip for the Fed

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.