Inflation, Inflation Expectations, and Monetary Policy - Speech excerpt

Sep 21, 2026

Uploaded by Violet

A speech excerpt by Sandra Pianalto explains the Federal Reserve’s view of inflation and inflation expectations in monetary policy. It distinguishes inflation from relative price increases, using copper and overall price growth as examples, and clarifies how core inflation measures remove volatile food and energy effects. The commentary argues that while relative prices can shift due to specific market supply and demand, lasting inflation harms prosperity mainly when persistent inflation alters inflation expectations. Anchoring expectations helps support sustainable economic growth.

LanguageEnglish

CategoryResearch & Report

FormatPDF

Pages5

Reading Time13 min

AccessFree to download

Inflation, Inflation Expectations, and Monetary Policy

The Difference between Inflation and a Relative Price Increase

Why Anchoring Inflation Expectations Is Important to Prosperity

by Sandra Pianalto Ihe Federal Open Market Committeor FOMC,decided to keep the federalfunds rate target unchanged at its lastmeeting on August 8.Although I cannotspeak for any of my colleagues on theCommittee,two factors were behindmy decision to support a pause at thatmeeting. First,while the elevated inflation num-bers concerned me,and indeed theystill do,the overal pace of economicactivity—especially housing activity—had begun to moderate,and the fulleffect of the FOMC's previous rateincreases had not yet been felt.I vieweda pause as appropriate because I wantedthe chance to accumulate more informa-tion before judging whether additionalpolicy firming would be needed. Another important element in my think-ing was the stability of inflation expecta-tions.I will quote directly from theminutes of the August 8 meeting here:"Following 17 consecutive policy firm-ing actions,members generally sawlimited risk in deferring further policytightening that might prove necessary,as long as inflation expectationsremained contained." Why should inflation expectationsmatter so much to the FOMC?Congresshas mandated that the Federal Reservecontrol inflation,of course,but also thatit promote maximum sustainablegrowth.And it so happens that wheninflation expectations are managedwell—specifically,when they areanchored,the central bank—the FederalReserve—can best promote sustainableeconomic growth. # Inflation,Inflation Expectations,andMonetary Policy ## ■ The Difference betweenInflation and a RelativePrice Increase Let me begin by making a crucial dis-tinction between inflation and a relativeprice increase.People often see priceincreases in some of the items they buyand assume that a period of inflation hasbegun.However,inflation is a conditionthat affects all prices,not just the price ofparicular goods or services. Consider copper prices.As of yesterdaycopper prices were roughly seven timeshigher than they were in 1965.I mightconclude that the cost of obtaining cop-per is now seven times higher than itwas 40-some years ago.But we all knowthat's not true. The truth is that,despite large swings upand down,the relative price of copper—that is,its price relative to the average ofall prices,based on the Consumer PriceIndex—tended to fall for much of theperiod from the mid-1970s through2001.Over the past several years,therelative price of copper has shot up,ofcourse,but even with this sharp increase,the relative price is nowhere near seventimes its 1965 level. Copper prices have not risen that muchmore than all prices,on average.The factis that all prices,on average,have risenfivefold in the past 40 years.This fivefoldincrease in allprices is inflation. A relative price increase is quite differentfrom inflation.Changes in relative pricesreflect changes in the supply and demandconditions of specific markets.Inflationreflects something else altogether. Careful readers of FOMC communi-cations will note that in addition totalking about actual inflation,thecommittee often talks about inflationexpectationsSandra Pianalto,thepresident and chief executive officerof the Federal Reserve Bank ofCleve-land,explains theimportant role thatinflation expectations play in themonetary policy process.This Com-mentary is taken from a speech shedelivered to the Copper DevelopmentAssociation's Global Market TrendsConference on September 8,2006 It's true that the two are not always soeasy to tell apart.Sometimes,we experi-ence such a large and persistent relativeprice change that it temporarily ripplesthrough the inflation data.The obviousexample is energy prices. Today,energy prices are greatly increas-ing the costs faced by virtually everybusiness and household in our country.Purchasing the same amount of gasolineor heating oil as we did acouple of yearsago requires us either to earn more,saveless,or purchase fewer nonenergy items.Adjusting to higher energy pricesrequires us to make real sacrifices.TheFederal Reserve cannot offset thesecosts beca

FAQs

How does the speech distinguish inflation from a relative price increase?

Inflation affects all prices and wages, driven by money supply growth, while a relative price increase reflects supply and demand changes in specific markets.

Why are copper prices used as an example?

Copper’s price rose significantly versus 1965, but relative to the overall average price level it did not rise anywhere near seven times, showing that not every price change is inflation.

Why does the Federal Reserve focus on anchoring inflation expectations?

Sustained inflation can change inflation expectations, and when expectations remain contained the central bank can better support maximum sustainable growth.

Sep 21, 2026

Uploaded by Violet