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Posts tagged with: "MICH"

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Are we expecting too much inflation?

CPI vs. University of Michigan's survey of consumers' inflation expectations

This FRED graph compares expected inflation and actual inflation. In recent years, expectations (in red) have been consistently above realizations (in blue). Why?

How people form expectations is a fascinating topic, as expectations drive so many economic decisions. One important point here is that, individually, we notice relatively few prices in an inflation measure. That is, individuals buy fewer goods than are included in the basket that determines the CPI. Also, we tend to recall only a few of the prices we encounter, in particular those that changed or changed more than we might have expected. (Read more about individual perceptions and bias.)

The graph below shows there’s quite a bit of variance in price changes across categories of goods. As expectations of future inflation are largely determined by perceptions of past inflation, the end result is an upward bias in expectations.

How these graphs were created: For the first graph, click on the CPI link on the FRED home page: Use the “Edit Graph” panel to change units to “Percent change from year ago.” Use the “Add Line” tab to search for “inflation expectation” and use the Michigan index. Restrict the sample period to start in 2017. For the second graph, start from the CPI release table, check the desired components, and click “Add to Graph.” Then use the “Edit Graph” panel to change the frequency of each line to “Annual, end of period.” Finally, in the “Format” tab, change graph type to “Bar”, close the tabs, and select period 2017-01-01 to 2020-01-01.

Suggested by Christian Zimmermann.


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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