That survey does not refer to a specific price index, so given that the average wedge between perceived inflation in the survey and actual CPI inflation is 1 percentage point, the proportion refers to the households that expect that inflation will be 3% or higher two years ahead. BIS central bankers’ speeches  9  risk derailing recovery by tightening and being unable then to course-correct. I have considerable sympathy with this risk-management approach. Table 3 provides an illustrative list of countries which have pursued the latter strategy – tightening during a post-crisis recovery and then course-correcting. The most celebrated (if that is the right word) was the Fed’s tightening in 1937. This is felt by many to have sent the US economy back into recession (Friedman and Schwartz (1963)). Almost 80 years on, the scars from that experience have yet to fade. The US experience in the 1930s was special, but not unique. In few of the cases in Table 3 did things go well. In each case the tightening was subsequently unwound. In a number of cases it had to be more than unwound due to its contractionary effects on the economy. Chart 19 shows the average path of output either side of the tightening. Most of these countries experienced several years of robust growth prior to the tightening, suggesting the economy was primed for lift-off. Yet when lift-off came, annual output growth weakened by around 2 percentage points in the following year, in the US by much more.
Several other features of household decision-making over recent years might also plausibly reflect the effects of insecurity: weak transactions in the housing market, which are 20% lower than their pre-crisis average; subdued job-to-job flows in the labour market, which remain below their pre-crisis average; and real wages which remain lower than historical relationships can explain, as workers’ bargaining power has been sapped. Over the past year, this cautious behaviour has been evident in households’ response to the income windfall arising from the fall in oil prices. This has boosted real incomes by perhaps 0.4%. And it appears also to have boosted consumer confidence. What it appears not to have translated into, or at least not yet, is higher consumption: retail spending growth is little different than before the oil price fall (Chart 16). One interpretation is that consumers are simply waiting to see if the fall in oil prices persists. My preferred interpretation is that it reflects instead the asymmetric response of a cautious consumer: good news has been banked, not blown. Consumers are pleased their glass is now less than half empty. But they are no more willing to drink it. This cautious behaviour is, to a degree, also mirrored among companies. This can be seen in the weakness of global investment since the crisis, despite the cost of company borrowing being at its lowest-ever levels (Chart 17). Uncertainty-induced weakness in investment has provided a continuing drag on recovery, globally if not nationally.