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Measuring inflation expectations, part I

An important element of monetary policymaking, as well as financial market pricing, is the level of inflation that people expect. There is no direct measure of each individual’s inflation expectations, but we can infer expectations at the aggregate level. One way we do this is to simply ask some people what they think. The Surveys of Consumers, an initiative of Thomson Reuters and the University of Michigan, ask many questions to evaluate consumer sentiment, and one question is what the inflation rate will be over the next year. The average answer is shown in blue in the graph, with the actual inflation rate shown in red. Note that this is not an entirely fair comparison: For any particular date, the blue line shows expectations over the next 12 months and the red line shows actual inflation over the past 12 months.

We also added a short green segment: This is the Fed’s 2% inflation target, announced on January 25, 2012. We see it falls between expectations and realizations.

If you want to learn more about inflation expectations, take a look at this recent Economic Synopses essay.

How this graph was created: Search for “inflation expectations” and the Michigan Survey should be your first choice. Then add the series “CPI” to your graph, making sure to change the units to “Percent Change from Year Ago.” Finally, for the green segment, choose “Add a Series” but select “Trend line” from the pull-down menu. Once that’s added, change the initial date to “2012-01-25” and use “2” for both start and end values.

Suggested by Christian Zimmermann

View on FRED, series used in this post: CPIAUCSL, MICH

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