Chart of the week

Consumers expect an inflation spike. Economists? Not so much

Consumers’ inflation expectations are about double economists’. We break down the divide, noting that volatility could escalate amid uncertainty.

May 21, 2021 | 2 minute read

Inflation expectations: Forecasters vs. consumers

Source: Federal Reserve Bank of Philadelphia Survey of Professional Forecasters, University of Michigan Surveys of Consumers, as of May 2021.

  • Equity markets have largely traded sideways for the past month as investors speculate about potential central bank tightening in the face of higher inflation. Minutes from the Federal Reserve’s April meeting heightened investor concern despite the Fed’s extremely hedged language regarding the potential for reducing its bond-buying program.
  • The pace and rate of inflation are at the heart of the issue behind the Fed’s decision. April’s above-consensus CPI report, however, was not enough to alter Fed speakers’ tone, as a large portion of the jump could be written off as the result of a post-pandemic reopening. The public, however, is clearly more concerned.
  • Our chart looks at the wide gap between inflation expectations among economists, as surveyed in the Federal Reserve Bank of Philadelphia’s latest Survey of Professional Forecasters, and the public, represented by the University of Michigan Surveys of Consumers.
  • As the chart shows, consumers have long expected slightly higher inflation than economists, but consumer forward expectations spiked in May, to 4.6%, about double that of economists’ expectations.1
  • Consumer inflation expectations play a significant role in explaining future inflation dynamics, and therefore the recent jump is notable.2 No matter who is proven correct over the coming year — economists or consumers — markets could continue to see heightened volatility as the market works out the ongoing uncertainty.

  • Federal Reserve Bank of Philadelphia Survey of Professional Forecasters, University of Michigan Surveys of Consumers, as of Q2 2021. Q2 data as of May 2021.

  • Federal Reserve Bank of San Francisco,

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