Consumer Inflation Expectations Hit A New 8-Year High

Inflation Expectations vs Year-Over-Year Inflation Measures Detail 2021-07

The New York Fed's latest Survey of Consumer Expectations shows another huge leap in inflation expectations.

Key Points

  • The median 1-year look ahead consumer inflation projection hit a data series high of 4.84%
  • The median 3-year look ahead consumer inflation projection hit a data series high of 3.71%

Consumers do not believe inflation is transitory.

Inflation Data Description

  • Median one-year ahead expected inflation rate: Respondents are asked for the percent chance that, over the next 12 months, the rate of inflation (deflation) will be 12% or higher; between 8% and 12%; between 4% and 8%; between 2% and 4%; between 0 and 2%. A generalized beta distribution is fitted to the responses of each survey participant and the mean of this distribution is calculated. This is the respondent’s “expected inflation rate”.
  • Median point prediction: Respondents are asked what they think the rate of inflation will be over the next 12 months. This is a point prediction (a single-value forecast).
  • The three-year forecasts are for three years instead of one.

Parroting the News?

One has to wonder how much of this is real opinion vs constant news recently of higher prices.

I suspect a bit of both as prices have gone up, but either way it's irrelevant, because:

Inflation Expectations Are Meaningless

Contrary to a widespread belief that inflation expectations matter, they are actually meaningless and the above charts show just that.

For most of eight years reported inflation was under 2% and often under 1%, and briefly negative. Yet, the look-ahead median point prediction was never below 2.9%.

If expectations mattered, why did the CPI and PCE stay below 2% so long?

A look at CPI components shows how silly it is to believe in inflation expectations.

CPI Percentage Weights

CPI Percentage Weights Elastic and Inelastic

I highlighted inelastic items.

Perhaps a portion of education is elastic. But a portion of other housing is inelastic as is a portion of communication and other goods.

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