Using 5 year ahead inflation expectations from the Michigan survey, not so much erosion in Trump 1.0. Trump 2.0 so far is another story.
Figure 1: Bordo-Siklos measure of Inflation Credibility (blue). Higher values indicate less credibility; assumes CPI target consistent with 2% PCE deflator target is 2.45%. Light orange highlight indicates Trump Administrations. Source: Michigan Survey and author’s calculations.
In a previous post, I used the NY Fed’s measure to calculate the Bordo-Siklos index; at the moment only the January observation is available for that dataset.
And as an indicator of the tails, here’s the 75 percentile expectation, minus 2.45 percentage points.
Figure 2: 75%ile of expected 5 year inflation minus 2.45% (blue). Higher values indicate less credibility; assumes CPI target consistent with 2% PCE deflator target is 2.45%. Light orange highlight indicates Trump Administrations. Source: Michigan Survey and author’s calculations.
When it comes to the thinking of the general public, Fed credibility is probably not a big deal for the formation of inflation expectations. Market participants and economists track the Fed. The public doesn’t.
Inflation expectations are largely a reflection of past inflation, backward looking. To the extent that confidence is an issue, it’s probably a vague sort of confidence in outcomes, not in particular institutions. That’s why Republicans and Democrats see the inflatio outlook so differently.
We’ve had a long period of low inflation, followed by a couple of years of higher inflation. We have headlines about the inflationary effects of tariffs, deportations and bird flu. We have some food prices that have risen substantially. These, I would think, have a greater influence on the inflation expectations of the general public than the felon-in-chief’s plans for the Fed.
That doesn’t mean the rapist-in-chief’s plans don’t matter. Piling tariffs, deportations, a weak response to bird flu, expansionary fiscal policy and default on Treasury debt* on top of a loss of Fed independence looks like a formula for persistent higher inflation.
* At its core, any Mar-el-Lago plan, whatever the details, amounts to default on Treasury debt.