And quite a bit of the high-frequency variation in the CPI arises from things that don’t directly affect nominal pay – taxes and import prices, for example – but do affect its real value. When taxes or import prices go down, real incomes rise (and viceversa). This produces a negative near-term correlation between inflation and real income growth; controlling for nominal pay, there is also a clear negative correlation between surveyed inflation expectations and household optimism (Chart 11). Chart 10 Consumer confidence has strengthened in US, Euro area  Source: European Commission, Conference Board  Chart 11 Surveyed household inflation expectations, optimism negatively correlated  Source: ONS, Gfk/EC, Barclays Capital. Note: * after controlling for current wage growth. These results might give one pause about whether the “delayed consumption” channel really is that important, or whether the surveys of inflation expectations are really telling you about what matters. The link between consumption and real interest rates is not an empirically strong one 13. Other measures of inflation expectations – for example from financial markets – are less depressed (Chart 9). A recent study using US data found that, even controlling for nominal income, there was no correlation across individuals between their reported expectations of inflation and spending 14. At the very least, the results are a reminder not to consider current inflation or survey measures of household inflation expectations on their own, but in the context of what’s happening to incomes and interest rates.
Zeti Akhtar Aziz: Vision of Asia Speech by Dr Zeti Akhtar Aziz, Governor of the Central Bank of Malaysia, at the Official Monetary and Financial Institutions Forum (OMFIF) – “Vision of Asia Award Acceptance Speech”, London, 30 June 2010. *  *  *  It is my great honour to be here today to receive this Vision of Asia Award from the Official Monetary and Financial Institutions Forum (OMFIF). I would like to thank Lord Desai, for his generous introduction and the advisory board of OMFIF for this recognition. As a policy maker from an emerging economy in Asia – for almost three decades – it has been both exhilarating and most rewarding. While being challenged to the limit, in particular, during the Asian financial crisis, the Asian economies have now emerged stronger and more resilient. This decade has seen a dramatic change in the nature of the globalisation process. As this process intensifies, Asian economies have demonstrated their flexibility to adjust and respond to the opportunities and challenges that have emerged. The initial wave of globalisation was in the form of trade. This was followed by the globalisation of corporations and more recently by the globalisation of financial flows. The recent global financial and economic crisis has called for the globalisation of policy given the limits for policy at the national level and the need to address cross border developments that have implications on the domestic financial system and hence the domestic economy.