TRICKY TO INTERPRET INFLATION EXPECTATIONS
But as much as economists agree on the importance of expectations, they disagree on the best way to measure them. Survey microdata reveals massive gaps in the public’s understanding of what inflation even is.
Evidence also suggests that Americans’ answers to inflation-expectation surveys tend to overweight variables such as gasoline and food prices, in part because they buy them frequently enough to notice the difference. Though important, central banks often downplay food and energy in their views about future inflation since they’re inherently volatile.
The hyper-partisan political environment coupled with the post-truth world of social media have made inflation expectations even trickier to interpret.
One Federal Reserve Bank of Cleveland working paper, authored with Morning Consult economist John Leer and outside academics, overlaid Facebook data and inflation expectations and found that social networks now play a prominent role in shaping expectations.
In contrast to the traditional media of old, narratives can now move at lightning speed, and the particulars of the story can vary widely across social media silos.
Indeed, the latest Michigan survey showed that it’s Democrats that are now driving the inflation expectations indexes higher – a sharp break from the past several years. In the next year, Democrats expect prices to rise around 5.1 per cent, presumably because of concerns about the effect of Trump’s proposed tariffs. Republicans’ expectations have collapsed to the point where they now imply essentially zero inflation.
Even accounting for Trump’s policy priorities, no mainstream economist surveyed by Bloomberg thinks that real inflation in 2025 will be anywhere near as high as Democrats fear or as low as Republicans anticipate. It’s hard to justify the disparity, since most inflation indexes – of both headline inflation and core, excluding food and energy – paint a consistent picture of inflation that is just slightly above normal.
