Have consumers’ long-term inflation expectations been anchored? – Liberty Street Economics

With the recent rise in inflation since the spring, there has been an increase in consumers’ short-term (one year ahead) and, to a lesser extent, medium-term (three years ahead) inflation expectations (see Study of consumer expectations). Although this increase in short- and medium-term inflation expectations is relevant for decision-makers, it does not provide direct evidence of “un-anchoring” of long-term inflation expectations. Roughly speaking, inflation expectations are considered unfounded when long-term inflation expectations change markedly in response to developments in inflation or other economic variables and begin to move away from levels that are in line with the central bank’s (implicit or explicit) inflation target. In that case, actual inflation may become unchecked and risk disappearing persistently away from the central bank’s target. Well-established long-term inflation expectations therefore represent an important measure of monetary policy success. In this post, we look at the current anchoring of consumers’ long-term inflation expectations using new data from Study of consumer expectations (SCE). Our results suggest that consumers’ inflation expectations for five years to August 2021 were just as entrenched as they were two years ago before the start of the pandemic.

That Study of consumer expectations is a monthly, Internet-based survey produced by the Federal Reserve Bank of New York since June 2013. It is a twelve-month rotating panel (respondents are asked to take the survey for twelve consecutive months) by approximately 1,300 nationally representative U.S. household managers. The SCE consists of a “monthly core survey” in which we ask the same set of questions and special surveys conducted on an ad hoc basis to address timely questions. We focus here on three specific surveys we conducted in July 2019, April 2021 and August 2021, in which we elicited consumers’ short-term and long-term inflation expectations.

To measure inflation expectations in the short term, we asked respondents “What do you expect the rate to be [inflation/deflation] to be over the next 12 months? ” To measure long-term inflation expectations, we asked respondents the same question, but we replaced “Over the next 12 months“With”During the 12-month period between M + 48 and M + 60, ”where M is the month in which the respondent takes the survey. So, for example, a respondent who took the survey in August 2021 was asked about inflation “During the 12-month period between August 2025 and August 2026.“Further information on the study and formulation of questions can be found in this Economic policy review Article.

We report in the table below the median point forecast in each study at the two horizons. We see an increase in the average one-year inflation expectation of one year between July 2019 and April 2021 (from 2.92 percent to 3.24 percent) followed by a sharp increase (from 3.24 percent to 4.84 percent) in the four months that separated the April and August 2021 surveys. In the special surveys, respondents were also asked about the cause (s) that led to this sharp increase. Predominantly, they mentioned that it was primarily driven by their own experience of higher prices during this period.

In sharp contrast, the same table indicates that the median five-year forecast for the inflation point remained unchanged at 3.00 percent between July 2019 and April 2021 and only increased modestly between April and August 2021 (to 3.16 percent). Thus, it seems to be financially similar market participants and professional predictors, the recent rise in actual inflation had little effect on the long-term inflation expectation of the median US consumer.

Median short and long inflation expectations

Source: Federal Reserve Bank of New York Study of consumer expectations (2013-2021).

Note: The reported medians are interpolated medians calculated using the iquantile module (Cox 2009) in Stata.

After comparing the key trends across the three surveys, we now compare the entire distribution of inflation expectations across all respondents. To do this, we draw in the chart below the proportion of respondents who report inflation point forecasts in different bins, focusing on the region between -3 percent inflation (or 3 percent deflation) and 9 percent inflation. The left panel is for one year a precondition for inflation expectations, while the right panel is for five years ahead. The gray bars are for the survey in July 2019, the gold bars for the survey in April 2021 and the blue bars for the survey in August 2021.

Starting with the distribution of one year of inflation expectations in the left panel, we can see a clear shift to the right, ie towards higher inflation values, between 2019 and 2021. In particular, the proportion of respondents who expect inflation one year from now to be between 1 percent and 3 percent decreased from 41 percent in July 2019 to 18 percent in August 2021. Meanwhile, the proportion of respondents who expect inflation in a year from now is between 5 percent and 7 percent more than doubled (from 12 percent to 28 percent) in the same period.

In contrast, the distribution of five-year inflation expectations over five years in the right-hand panel in the chart below remained remarkably similar across the three surveys we conducted over the past two years. Although we see small differences in the proportion of respondents who expect inflation in five years from now to be between 1 percent and 3 percent, no clear pattern emerged in the right panel of the chart. Thus, our survey results suggest not only that the average long-term inflation expectation of consumers has changed slightly over the last two years, but also that the whole distribution of long-term inflation expectations has changed slightly.

Distributions of expectations for short and long-term inflation

Source: Federal Reserve Bank of New York Study of consumer expectations (July 2019, April 2021, August 2021).

Note: Answers less than -3 percent and greater than or equal to 9 percent are excluded from the chart. The percentages on the vertical axis represent the percentage of the whole sample.

Does this mean that respondents have not revised their long-term inflation expectations at all over the last two years? To answer this question, we focus on the subset of 674 respondents who conducted both the surveys in July 2019 and August 2021. We find that while 19 percent of these repeat respondents reported Exactly the same long-term inflation expectations at two-year intervals, most respondents changed their five-year inflation expectations going forward between 2019 and 2021, as can be expected given the unprecedented events of this period. However, these changes are almost symmetrical with an almost equal number of respondents revising their long-term inflation expectations up and down. While downward revisions may seem surprising in the current high-inflation environment, they are consistent with a few commentators highlighting the risk that longer-term structural factors that have led to declining inflation and inflation expectations in recent pre-pandemic years could resume. , when the current supply disruptions and the extraordinary relative price movements caused by the pandemic have run their course.

Our special studies provide further evidence that long-term inflation expectations are as well anchored in 2021 as they were in 2019. In particular, we conducted a series of experiments in which we measured the sensitivity of five-year inflation expectations ahead to sustained hypothetical shocks to past inflation and to hypothetical surprises in future near-term inflation. For example, respondents were asked to report how their five-year inflation expectations would change in the future if “in each of the last three years inflation had been bottom than it really was by 1 percent annual“Or if”inflation over the next 12 months turns out to be 1% higher than you [currently expect]?“The results of these experiments indicate modest changes in long-term inflation expectations in all treatments and revisions of similar magnitude in the surveys conducted in 2019 and in 2021. Furthermore, the proportion of respondents who appear to have fully anchored inflation expectations (in the sense of , that their long-term inflation beliefs did not fully respond to inflation shocks) remained remarkably stable around 40 percent over the past two years.

Taken together, these survey results provide evidence that although the current rise in inflation has affected short- and to a lesser extent inflation expectations in the medium term, it did not significantly affect the anchoring of long-term inflation expectations.

Oliver Armantier is Assistant Vice President of the Federal Reserve Bank of New York’s Research and Statistics Group.

Fatima Boumahdi is a senior research analyst in the Bank’s research and statistics group.

Leo Goldman is a senior research analyst in the Bank’s research and statistics group.


Gizem Kosar
is a senior economist in the Bank’s research and statistics group.

Jessica Lu is a senior research analyst in the Bank’s research and statistics group.

Giorgio Topa is Vice President of the Bank’s Research and Statistics Group.


Disclaimer
The views expressed in this post are those of the author and do not necessarily reflect the Federal Reserve Bank of New York or the Federal Reserve System. Any errors or omissions are the responsibility of the author.

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