Inflation Expectations Vary By Age

Consistent muted inflation expectations have encouraged the Fed to keep interest rates low for the past decade-plus. These expectations are used as an excuse/explanation when inflation spikes temporarily like it currently is. It’s a fair point because consumer behavior impacts prices. Pent-up demand being unleashed following the pandemic is causing higher inflation. Long-term low inflation expectations are a self-fulfilling prophecy. Low inflation and rates are causing investors to pay up for growth stocks.

Apparently, inflation expectations differ by generation, but they are correlated. As you can see from the chart below, those under 40 expect inflation slightly above 3% which is accurate in the near term but will be too high once this brief post-COVID-19 period ends. It’s up from just above 1.5% last year. The under 40 category is large, but it makes sense because everyone under 40 didn’t experience the high inflation from the late 1970s to the early 1980s as adults.

The 40 to 60 age group expects about 4% inflation which is way too high. It’s up from its usual mid-2% prediction which is a little higher than we usually see. The over 60 group expects almost 5% inflation which is above its normal 3% rate. Both of those are way too high. This group of Americans remembers the last bout of very high inflation a few decades ago.

Young people probably don’t think 10% inflation is possible. They can’t even conceptualize it. Older people are afraid the current bout of inflation will last like the last period. Older people have a lower propensity to consume since they are retired. High inflation hurts older people on fixed incomes the most. Luckily this period of high inflation will be over within a few months. Manufacturing and commodities will roll over in the next few months. The supply chain issues will be fixed by the end of the year.

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