Inflation Expectations of Consumers

A lot of coverage of how the NY Fed’s survey of consumers’ inflation expectations had moved substantially (e.g. NYT). A couple of observations: (1) household/consumer-based expectations are upwardly biased; (2) the high inflation is expected to be temporary, in the sense that the expected inflation in the next 12 months is higher than 12-month inflation ending in June 2024.

Figure 1: Actual CPI year-on-year inflation (bold black), and median inflation (blue line), and interquartile range (blue area). Source: BLS, NY Fed, and author’s calculations.

The dispersion of forecasts has increased in the last few months. Over the period of the survey’s existence (shown above), the median forecast is above the ex-post realization. This characteristic is shared by the longer-running Michigan survey of households (see this post).

Inflation in the 3rd year from now is anticipated to be lower than over the next 12 months.

Figure 2: Median expected inflation over the next year (blue), in the year ending June 2024 (brown), and mean expected inflation in the 12 months ending June 2022 (pink square). Source: BLS, NY Fed, WSJ July survey.

Notice that the professional economists surveyed by the Wall Street Journal in early July expect a substantially lower inflation rate than consumers.