Paul Krugman Notes New York Fed Research (Analysis here) suggests that household inflation expectations are less sensitive to current realities than they have been in the past. As a reminder, here are household expectations (Michigan, NY Fed) vs. others (economists) in 1 year.
figure 1: CPI YoY Inflation (black), Median Expectations from Professional Forecasters Survey (Blue+), Median Expectations from Michigan Consumer Survey (Preliminary) (Red), Median NY Fed Consumer Expectations Survey (Light Green) , forecast from the Cleveland Fed (pink), average from the Coibion-Gorodnichenko Corporate Expectations Survey [light blue squares]. Source: BLS, University of Michigan via FRED and Investing.com, Reuters, Philadelphia Fed Survey of Professional Forecasters, New York Fed, Cleveland Fed and Kobe and Gorodnichenko.
Krugman’s main point is that current events are very different from past events (according to the Michigan survey) because long-term expected inflation does not correspond one-to-one with short-term inflation. Instead, it moves less. Here’s Krugman’s chart comparing the current episode to episodes from February 1980 and September 1990.
resource: Krugman (2022).
If the expected inflation rate for the next 5 years is 3% on average and the expected inflation rate for 1 year is 3.1%, then the implied expected inflation rate for those years between 1 and 5 will average 3% (= (3×5 – 3.1)/4 ).
Note that consumer/household-based expectations are on average higher than economists and other forecasters expect, and (as discussed) here), before the persistent inflation surge Biased upwards. Household expectations are currently about two and a quarter percentage points higher than economists expect — so don’t rely on the accuracy of these household forecasts.However, they may be better suited for thinking about how inflation responds to expectations (see Kobe and Gorodnichenko (2015).
