While consumers have come to expect higher inflation over the short-term, inflation expectations over the long-term have remained “remarkably stable” since last summer, according to new research released Monday by the New York Fed.
Despite all the news on high inflation since August, consumers who were included in three Fed surveys through January expected inflation five years in the future to be running very close to 3%.
In addition, while short-term inflation expectations are highly responsive to inflation news, medium-term expectations seem to exhibit lower sensitivity to inflation surprises during the pandemic than before it, the regional Fed bank said in a posting on its Liberty Street economic blog.
“Taken together, these findings indicate that consumers are taking less signal than before the pandemic from inflation news in updating their longer-term expectations, and that they do not view the current elevated inflation as very long lasting,” the blog post concluded.
Inflation as measured by the consumer price index surged to a 7.5% annual rate in January, the highest in 40 years. Earlier Monday, St. Louis Fed President James Bullard said CPI data since October show “inflation is broadening and possibly accelerating.”
There are many measures of inflation expectations and the picture can be confusing. Some Fed officials say they rely more on market measures of inflation expectations, notably trading in the Treasury inflation-protected securities market.
The blog post examined evidence during the pandemic from the New York Fed’s survey of consumer expectations, which was also released Monday.
Short-term inflation expectations are for one-year ahead. They can be volatile and heavily influenced by prices at the gas pump and groceries. In January, median one-year-ahead inflation expectations decreased to 5.8% from 6% in the prior survey in December. That’s the first drop since October.
Medium-term inflation expectations are for three years ahead. Medium-term inflation expectations decreased by 0.5 percentage point to 3.5% in January, the largest one-month decline since the survey was starting in 2013.
Still, short-term and medium-term inflation measures remain elevated compared to their pre-COVID-19 reading close to 2.5%, the Fed said.