‘Tinker Bell’ Economics Colors Inflation Predictions: The notion is that if we all expect inflation, we’ll seek higher wages, prices and rents, and that will produce the inflation we expect. Conversely, no matter what’s happening in Libya or grain markets, no matter how much yelping about commodity prices squeezing profit margins, if we all believe the Fed won’t permit inflation to take off, it won’t. Call it the Tinker Bell school of economics.

Oil prices are rising. Food prices are up. The world economy is gaining momentum. Central banks, still fighting aftereffects of the financial crisis, are keeping interest rates low. Is an outbreak of U.S. inflation around the corner? Federal Reserve Chairman Ben Bernanke says it isn’t. It’s hard to sustain inflation with so many people out of work and so many offices, stores and factories empty, he reasons. Plus he sees no big rise in "inflation expectations," the wage and price increases that business executives, consumers, workers and investors anticipate."Inflation expectations remain well anchored," Fed officials concluded confidently at their last meeting, minutes show, despite obvious inflationary threats abroad. Translation: Food and energy price increases won’t prompt higher wages and prices throughout the U.S., partly because people don’t think they will.
By David Wessel, Feb. 24, 2011 WSJ

Link to article

02/24/11 WSJ