Consumer Inflation Expectations Jump 7th Straight Month To A New Record High

Inflation expectations jumped. Economists think that matters. Let's investigate the idea.

Belief in the Transitory!

I created the above chart from the New York Fed Survey of Consumer Expectations.

Not once in 8 years did consumer expectations dip below 2%. Indeed, the lowest 1-year look ahead rate is 2.33%.

My key observation is that consumers believe inflation measures under 2% are transitory given they never predict such events looking ahead no matter what the starting point, even negative.

The New York Fed key findings do not mention my key observation but they do note that inflation expectations are now at record highs.

Survey Description 

The SCE is a nationally representative, internet-based survey of a rotating panel of approximately 1,300 household heads. Respondents participate in the panel for up to 12 months, with a roughly equal number rotating in and out of the panel each month. Unlike comparable surveys based on repeated cross-sections with a different set of respondents in each wave, our panel allows us to observe the changes in expectations and behavior of the same individuals over time.

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.

Reported Key Inflation Findings

  • Median one-year-ahead inflation expectations increased by 0.6 percentage point in May to 4.0%, the seventh consecutive monthly increase and a new series high. Median inflation expectations at the three-year horizon increased from 3.1% to 3.6%, the second-highest level in this series, behind only the reading from August 2013. The increase at both horizons is particularly pronounced among respondents age 60 and over and among those with a high school degree or less. 
  • Median inflation uncertainty—or the uncertainty expressed regarding future inflation outcomes—increased sharply at the short- and medium-term horizons. Both measures are well above the levels observed before the outbreak of COVID-19. 
  • Median year-ahead home price change expectations increased by 0.7 percentage point to 6.2%, substantially above the 2020 average of 2.3% and marking a third consecutive month with a new series high. The May increase was driven mostly by respondents who live in the “West” and “South” Census regions. 
  • Expectations about year-ahead price changes increased for all commodities in May. The median one-year-ahead expected change in the price of food and rent increased by 2.2 and 0.3 percentage points, respectively, to new series highs of 8.0% and 9.7%. The median one-year-ahead expected change in the price of gas and in the cost of medical care rebounded by 0.6 and 0.3 percentage point, respectively, to 9.8% and 9.4%. Finally, the median one-year-ahead expected change in the cost of a college education increased by 0.2 percentage point to 6.1%.
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