Economists believe that household inflation expectations can be self-fulfilling prophecies, and a recent survey is sending mixed signals.
can be self-fulfilling prophecies, and a recent survey is sending mixed signals. A new report from the University of Michigan on Friday showed that short-term inflation expectations are receding while longer-term ones are mounting. But it’s best to ignore the month-to-month volatility and focus on the big picture: Both readings are too high, and they’re likely to keep the Federal Reserve aggressive in its fight against rising prices.
Respondents in the university’s consumer sentiment survey now expect prices to rise 5 per cent over the next year, down slightly from 5.2 per cent in the previous report, according to preliminary results released Friday. In the long run, respondents expect prices to rise 3 per cent over the next five to 10 years, up from 2.9 per cent previously.Actually, both.
Friday’s slight uptick in the longer-term reading matters for markets insofar as it influences Powell’s thinking, but it could well prove to be another blip in the small and relatively volatile survey.
For their part, short-term inflation expectations get short shrift in policy discussions because they’re much more volatile. It takes a sustained period of higher prices — and higher short-term inflation expectations — forto move higher. Yet new research from the Federal Reserve Bank of San Francisco this week showed, in particular, that the shorter-term expectations are actually a greater determiner of wage growth than longer-term ones.
One encouraging development is that several different surveys are now confirming one another in showing declining short-term inflation expectations. The New York Fed’s Survey of Consumer Expectations showed this month that expectations are dropping, while an internet survey from Morning Consult, in conjunction with researchers from the Cleveland Fed, shows “indirect” inflation expectations have been declining for weeks.
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