Weekend special: What happens when you hit the panic button and stick your currency in the toaster?

Yesterday's University of Michigan survey was a remarkable piece of data, and Macro Man could not let it pass without comment. The headline reading was the lowest since 1980, providing further evidence of the emergence of a consumer recession, whatever the retail sales figures might say. But the truly remarkable aspect of the data was the sharp rise in consumers' inflation expectations; to Macro Man's mind, this is an entirely logical outcome when a central banks decides to abuse its currency.

Regular readers will recall that when the Fed cut 50 bps in September, Macro Man opined that the dollar was toast. When BB and co. slashed rates by 75bps when the stock market got Kerviel'ed, it seemed like they were hitting the panic button. And what's happened since then? Median one year inflation expectations have rocketed from 3.1% to 5.2%. Sadly, Bloomberg doesn't have historical data for average 12 month inflation expectations; those are now a resounding 7%!!! It seems as if not everyone is living in the Fed's hedonically and seasonally adjusted, core goods world.

The rise in inflation expectations is all the more remarkable when put into historical context; they are now the highest since February 1982. Now, just because you expect higher inflation and demand higher wages doesn't mean you'll get 'em, especially in the context of an incipient recession. But with the balance of probability favouring a Democratic sweep come November, what odds that there emerges a legislative response to the juxtaposition of near-record corporate profits as a % of GDP along with stagnant/negative real wage growth?
Macro Man has long believed that inflation would be the straw that broke the Bretton Woods II camel's back; what's interesting is that the inflationary feedback mechanism is hurting not only those economies that are BWII participants, but the anchor itself, via inflation.

Sadly, we still appear to be a long way away from allowing common senses to prevail amongst the BWII peggers; far better to send the world into an inflationary spiral than allow a few currency punters to make money speculating!