Rising Expected Inflation … to about 2%

The Survey of Professional Forecasters (SPF) February release and the January five year breakeven inflation rate suggest accelerating inflation – up to about 2.1%-2.2%

Figure 1: Year on year expected inflation from University of Michigan survey median response (blue), from Survey of Professional Forecasters median response (red +), and implied five year average inflation from spread between five year constant maturity Treasurys and TIPS (green). NBER defined recession dates and peak in gray. Source: U.Michigan via FRED, SPF via Philadelpia Fed, and Treasury via FRED, NBER, and author’s calculations.

The five year breakeven has risen further, to 2.37% as of yesterday (2/16). The latest observation for the Michigan survey of households (as opposed to economists) is for December, and comes in at 2.5%. Interestingly, households have consistently higher expectations of year-ahead CPI inflation, relative to forecasters. See Coibion and Gorodnichenko (2015) for further discussion of the differences, and which one better fits the expectations augmented Phillips Curve; Detmeiter et al. (2016) examine how household inflation perceptions relate to inflation expectations.

Where will year-on-year inflation be in a year from now? Forecast errors for the Michigan and SPF (both based on medians) are shown below.

Figure 2: Forecast error for year on year expected inflation from University of Michigan survey median response (blue), from Survey of Professional Forecasters median response (red +).NBER defined recession dates and peak in gray. Source: U.Michigan via FRED, SPF via Philadelphia Fed, NBER, and author’s calculations.

Over the sample period displayed in Figure 2, The average forecast error is -0.96 ppts for the Michigan survey (i.e., households overpredict inflation), while that for the SPF is -0.06 ppts. (The five year breakeven underpredicts on average 5 year inflation by 0.11 ppts for 2003-2015, although there is a lot of upward skew, so median error is overprediction.)


10 thoughts on “Rising Expected Inflation … to about 2%

  1. pgl

    “The five year breakeven has risen further, to 2.37% as of yesterday (2/16).”

    WAIT, WAIT – Bruce Hall told us last night we are in hyperinflation so this cannot be right. We must check the other breakeven rates as Bruce is sure Menzie is misrepresenting the data. So let’s check with FRED:

    10-year: 2.24%
    20–year: 2.16%
    30-year: 2.10%

    Damn it the market data MUST be wrong. OK – time for Judy Shelton to manipulate her datasets to prove that Brucie’s HYPERINFLATION fear is warranted.

  2. Dr. Dysmalist

    Unfortunately, Bruce Hall won’t be the only one getting an attack of the screaming meemies about inflation. I fully expect some goldbug (or something similar) to show up soon on some Fox News program to sound the alarm. Within an hour, it will be the new GQP orthodoxy, and the RWNJs in Congress will immediately start using it as their latest reason to oppose the Covid relief bill. Heck, by now it could have already happened and I am blissfully unaware of it.

    1. pgl

      If it shows up on Fox News – I certainly will not be seeing it live. OK – people like Kevin Drum and the folks at Talking Points Memo will summarize their latest. And of course our Usual Suspects will hype it here as the gospel.

  3. rjs

    the headline PPI was up 1.3% in January after rising 0.8% over all of 2020; the BLS doesn’t directly explain it, but it appears that at least part of the reason for the jump in January was due a recalibration of weight allocations used to calculate the overall indexes “to more accurately reflect recent sales patterns”, which would have thus increased the weighting of commodities and services in greatest demand..

    the takeaway from that would be we need to understand how the indexes are calculated before even talking about inflation…after all, the same data collection goes into both the calculation of the CPI and the PCE price index, often with quite different results…

  4. Moses Herzog

    I was watching a show this evening that was somewhat lively. And terminology can be an interesting thing. Someone on the show offered the idea that this might more accurately be termed reflation rather than “inflation”. I thought that was a fascinating perspective from which to look at it.

  5. Barkley Rosser

    OK, folks this has been pointed out here before by me. But given comments by various people here, I think it is worth reminding you all of certain facts.

    So in the mid-to-late 90s there was a shift in views that spread across central banks regarding the appropriate inflation target. The US had never had an official inflation target and was officially without any governing rules, even though John Taylor would claim that after 1985 and for the next two decades or so the US Fed effectively followed what he observed them doing, and which has now gotten his name attached to it, the “Taylor Rule.”

    More recently as that rule broke down with the Great Recession, the 2% inflation target rule became dominant, and after a period at the Fed of being sort of semi-official, indeed became eventually actually fully official, with this now the essentially universal inflation target

  6. Larry

    I don’t believe it. And I haven’t believed it for years. Inflation is much worse than stated.

    I bought a two year old pickup truck in 2006 for 13K. In order to replace it today I would have to pay at least 28K for a two year old truck with less capability than the truck I bought in 2006.

    I just bought two new tires for this truck. Two years ago they cost $340. Today they cost $370. That’s a 10% increase in two years. And that was the cheapest price in town.

    Now lets talk about the housing market. My house cost a lot of money in 2005. Today, it is worth a lot more than a 2% inflation rate over the last 16 years.

    Have you gone shopping for vegetables recently? If you have then you should have discovered that they cost a lot more than they used to.

    I think there is something seriously wrong with who we measure inflation.

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