Inflation isn’t just about prices going up — it’s about how businesses, markets, and people expect prices to behave in the future. And those expectations? They have a real impact on today’s markets.
Supply Chains, Federal Spending & Inflation: A Feedback Loop
Supply chain disruptions, fiscal stimulus, and consumer demand all interact in ways that make inflation incredibly complex.
For example:
- When U.S. GDP growth misses expectations due to supply chain slowdowns, pricing pressures often follow.
- Rising energy prices — which factor heavily into most inflation indexes — can push those price indexes even higher.
- As prices rise, inflation expectations begin to shift — and that shift alone can feed further inflationary pressure.
As former Federal Reserve Chair Ben Bernanke put it back in 2007:
“The state of inflation expectations greatly influences actual inflation.”
Put simply: what people expect often becomes reality.
Inflation Expectations Are Sticky — But Not Unbreakable
While inflation expectations today are generally more anchored than they were in previous decades, they still move — often in response to economic news.
Studies like Gürkaynak, Sack, and Swanson (2005) show that long-term inflation expectations (measured by yield spreads between nominal and inflation-protected bonds) still react to market data and headlines — sometimes significantly.
That responsiveness makes inflation expectations a key variable for policymakers, investors, and markets alike.
The Fed’s Balancing Act: Rates vs. Stimulus
The Federal Reserve has one primary mandate around inflation: stabilize prices. Their most effective lever? Interest rates.
- When inflation rises, the Fed raises rates to cool economic activity and bring prices back into balance.
- But when federal stimulus pumps additional cash into the economy — like during pandemic-era relief efforts — it can fuel demand and contribute to even higher inflation.
We’ve seen exactly that: historic demand surges combined with stimulus-driven liquidity have driven the sharp inflation spikes of recent years.
The Big Takeaway
Inflation isn’t just a number — it’s a psychological force inside the economy. Expectations shape behavior, markets respond to perception, and policy tries to walk the line between growth and stability.
At Black Swan Management Group, this is exactly the type of dynamic we prepare for: markets don’t move in straight lines, and neither should portfolios.
Sources:
- Bernanke, B. (2007). Inflation Expectations and Inflation Forecasting.
- Heath, M. (2021). Bloomberg Economics.