Expectations of inflation is never results-based, but still has huge repurcussions

MWF (Wednesday) Briefing:

The expectation or perception of something happening has as big of an effect or maybe even more of an effect on human behavior than the reality of the situation. The dance around the globe currently centers on the maypole of inflationary worries caused by a spike in fuel and lowered global demand for goods and services.  The acclimatization process associated with expectation many times creates the outcome.

• China's benchmark stock index fell 7.7% to its lowest close in over a year, due to increasing worries that the country is vulnerable to a slowing global economy and soaring inflation. WSJ

• The Foreign Corrupt Practices Act (F.C.P.A.) is swinging back in style after decades of being ignored, going after a broad range of companies for alleged kickbacks to government officials around the globe.  Portfolio

• The lack of investment opportunities and the massive flow of money into private equity funds are leading fund managers to get creative in their investment strategy. NYT

• Fear of inflation makes it inflation?  The economy continues to display output growth but shows recession-like symptoms with other indicators. Consumer-experience barely positive growth isn't that different from no or negative growth. But as Menzie Chinn points out, there are other things to consider not just growth, but also how growth compares to potential expansion. In a post on the economy's "negative output gap", Mr Chinn attempts to place our current situation in context. He uses the National Bureau of Economic Research's recession definition. Economist

• Willie Horton goes Web 2.0 with Obama. Wired

• China released its monthly crude oil import figure show that imports during May reached their second highest levels on record regardless of the fact that oil has hit its highest price. China is considering dropping gas subsidies.  This should take some of the artificial demand inelasticity off gas demand as consumers in China will actually have to pay something closer to market prices for their gasoline.  Bespoke

• Fed Vice Chairman Donald Kohn said on Wednesday that the rise in energy prices has fueled an inflationary psychology in the U.S. If it continues, expectations might start to build in for future inflation perception and radically change spending habits to follow the inflationary psychology.  It might be a problem if it's not mitigated soon. NYT