#economics #economy #inflation
The University of Michigan survey of inflation expectations has shown mixed performance when compared to actual inflation rates:
1. Short-term (one-year-ahead) expectations have generally overestimated inflation:
- Since 2012, excluding the post-COVID period of high inflation, the University of Michigan Expected Inflation Rate for one year ahead has consistently overpredicted future inflation every month[1].
- Consumer-based surveys, including the University of Michigan's, tend to overestimate future inflation[1].
2. Long-term (five-year) expectations have remained relatively stable:
- Since the early 2000s, the University of Michigan's five-year inflation expectations have remained within a 1.5 percentage point range, never falling below 2% or rising above 3.5%[1].
- This stability suggests that longer-term expectations poorly predict actual inflation variations but may reflect credibility in the Federal Reserve's inflation target[1].
3. Recent performance:
- In January 2025, year-ahead inflation expectations rose to 3.3%, up from 2.8% in December 2024[7]. This increase occurred despite actual inflation rates not being explicitly mentioned in the search results for this period.
- The persistent overprediction prior to 2020 may suggest that current elevated levels of inflation expectations could still be overestimating future inflation[1].
4. Demographic factors:
- Different demographic groups have varied experiences with inflation, leading to heterogeneous expectations across these groups[3].
- Younger consumers with at least a high school education appear to be the most salient group in driving inflation expectations[3].
In conclusion, while the University of Michigan survey of inflation expectations has not always accurately predicted actual inflation, particularly in the short term, it remains a valuable tool for understanding consumer sentiment and expectations regarding future price changes.
Citations:
[1] https://www.richmondfed.org/publications/research/economic_brief/2023/eb_23-03
[2] https://data.sca.isr.umich.edu/fetchdoc.php?docid=77164
[3] https://economics.ucr.edu/wp-content/uploads/2022/11/Branch-12-2-22.pdf
[4] https://tradingeconomics.com/united-states/consumer-confidence
[5] https://data.sca.isr.umich.edu/fetchdoc.php?docid=24774
[7] https://tradingeconomics.com/united-states/michigan-inflation-expectations
[8] https://www.investing.com/economic-calendar/michigan-1-year-inflation-expectations-389
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