Inflation Expectations

Stormtrooper: Let me see your identification.
Obi-Wan: You don't need to see his identification.
Stormtrooper: We don't need to see his identification.
Obi-Wan: These aren't the droids you're looking for.
Stormtrooper: These aren't the droids we're looking for.
Obi-Wan: He can go about his business.
Stormtrooper: You can go about your business.
Obi-Wan: Move along.
Stormtrooper: Move along, move along.
--Star Wars

Because governments are perpetually inflating the money supply, one has to wonder how they get away with it. Why doesn't the citizenry catch on and either demand a halt to inflation or dump the currency?

People would likely do one or the other of these things if they understood what was going on. But inflation sometimes unfolds slowly over long periods of time. Its insidious nature reduces detectability. However, even low rates of inflation destroy wealth over time.

Even if inflation was readily detectable and rapid, governments try to convince the public otherwise by managing 'inflation expectations.' This is the Fed-i Mind Trick. If people are told that inflation is low and that officials in power do not expect inflation to rear its ugly head in the future, then perhaps people will believe it and keep those colored pieces of paper in their wallets rather than furiously unloading them for things of value.

The federal government engages in such a propaganda campaign and has been doing so for many years. The first step was to control the semantics of inflation, and shift the conversation away from the expansion of money and credit supply (the classical definition of inflation) to the increase in prices of consumer goods and services (one of the many possible consequences of inflation).

Next, control how inflation is measured. The headline metric is based on what has become known as the Consumer Price Index (CPI). The CPI is supposed to reflect changes in the price of a hypothetical basket of consumer goods. It takes no PhD to realize that this metric can be subject to severe manipulation, i.e., what goods are included in the basket, how to adjust for product innovations improvements, how to compensate for substitution effects (people eat more hamburger when steak gets expensive), etc.

Finally, populate the Federal Reserve with impressively credentialed people and have those people constantly state that they support a strong dollar policy and foresee no inflation on the horizon.

What we know from history is that managing inflation expectations works until it doesn't. Confidence in a currency can change on a dime (!). When it does, no amount of propaganda can keep people from swapping out of colored paper and into things of greater value.