Friday, June 24, 2022

Inflation: Expectation vs Reality

The University of Michigan publishes monthly surveys of year ahead inflation expectations. Right now, people think it will be at 5.4%, well below today's 8.60%.  The chart shows this expectation (blue line) and current inflation.  It's a pretty good fit, for the most part. If anything, people are more conservative in their predictions than reality.

In the next chart, I look at the spread between current inflation and prediction - see chart below. It is now at the highest level since 1982, ie people are still predicting/hoping that current high inflation (8.6%) will come down fast.  But, the last time people's predictions were this optimistic (1980s) they were proven dead wrong as inflation soared to near 15%.

Only time will tell what will happen, but for now I'll go with "hope dies last".

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