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Consumer Inflation Expectations Hit a New 8-Year High

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17 comments on Consumer Inflation Expectations Hit a New 8-Year High

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The New York Fed’s latest Survey of Consumer Expectations shows another huge leap in inflation expectations.

Key Points

  • The median 1-year look ahead consumer inflation projection hit a data series high of 4.84%
  • The median 3-year look ahead consumer inflation projection hit a data series high of 3.71%

Consumers do not believe inflation is transitory.

Inflation Data Description

  • Median one-year ahead expected inflation rate: Respondents are asked for the percent chance that, over the next 12 months, the rate of inflation (deflation) will be 12% or higher; between 8% and 12%; between 4% and 8%; between 2% and 4%; between 0 and 2%. A generalized beta distribution is fitted to the responses of each survey participant and the mean of this distribution is calculated. This is the respondent’s “expected inflation rate”.
  • Median point prediction: Respondents are asked what they think the rate of inflation will be over the next 12 months. This is a point prediction (a single-value forecast).
  • The three-year forecasts are for three years instead of one.

Parroting the News?

One has to wonder how much of this is real opinion vs constant news recently of higher prices.

I suspect a bit of both as prices have gone up, but either way it’s irrelevant, because:

Inflation Expectations Are Meaningless

Contrary to widespread belief that inflation expectations matter, they are actually meaningless and the above charts show just that.

For most of eight years reported inflation was under 2% and often under 1%, and briefly negative. Yet, the look ahead median point prediction was never below 2.9%.

If expectations mattered, why did the CPI and PCE stay below 2% so long?

A look at CPI components shows how silly it is to believe in inflation expectations.

CPI Percentage Weights

I highlighted inelastic items.

Perhaps a portion of education is elastic. But a portion of other housing is inelastic as is a portion of communication and other goods.

Recreation is elastic and so is apparel (assuming one does not ruin one’s only coat or shoes).

Somewhere between 80% and 90% of household purchases are inelastic.

Inelastic Item Questions

Q: If consumers think the price of food will drop, will they stop eating? Will they eat twice as much if they expect prices will rise?

Q: If consumers think the price of gas will drop, will they stop driving?

Q: If consumers think the price of rent will drop, will they hold off renting until that happens? Will they rent two apartments if they expect the price to rise?

Q: Will consumers delay medical services if they think prices will drop? Will they have two operations if they think prices will rise?​

Elastic Item Questions

Q. Better deals on TVs and computers are always around the corner. Does that stop TV and computer purchases?

Q. If someone wants a new refrigerator, toaster, or stove will they wait two months if they think prices will decline?

Asset prices are a different matter, however.

Asset Price Expectations

  • People do buy stocks it they believe prices will rise. They avoid stocks or sell them if they expect prices will drop.
  • People will stretch to buy a home if they expect prices to rise. They wait if they expect prices will drop.

Note that every member of the Fed talks about expectations that don’t matter ignoring those that do matter.

And not only does the Fed ignore asset price expectations, they ignore asset prices totally. That’s how you get three enormous bubbles in 20 years.

Inflation Expectations vs Year-Over-Year Inflation Measures Since 2013

Expectations Fantasy

  • For most of 8 consecutive years, year-over-year CPI and PCE was under 2%.
  • In that same time frame, the Median 3-year estimate and the median point projections was seldom below 3%.
  • If inflation expectations mattered, that chart would be impossible.
  • Alternatively, one might say people believe low inflation is transitory.
  • Yet, we constantly hear the Fed yapping “Inflation expectations are well anchored”.

It’s a good thing for the Fed that expectations don’t matter because 5+% expectations can no longer be considered well anchored.

The only thing that’s clearly well anchored is Fed groupthink silliness.

“Inflation is Half Our Mandate”

On August 3, Fed Chair Jerome Powell accidently stated the truth.

“Inflation is Half Our Mandate” said Powell before quickly correcting himself.

Click on the link for additional amusing quotes.

CPI Jumps Another 0.5% in July, 5.4% From a Year Ago (No Change)

On Wednesday, the BLS released its inflation report for July. 

For discussion, please see CPI Jumps Another 0.5% in July, 5.4% From a Year Ago (No Change)

What is the Fed’s Real Dual Mandate?

Groupthink aside Question of the Day: What is the Fed’s Real Dual Mandate?

I propose radical changes because the Fed has proven incompetence at price stability.

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Mike Shedlock

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17 Comments
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RonJ
RonJ
5 years ago
“I propose radical changes because the Fed has proven incompetence at price stability.”
I don’t consider it to be incompetence. The FED bankers know that stable prices = ZERO inflation over time.
A 2% per year mandate is purposeful, not out of ignorance. Unlike U.S. Notes, FED Reserve Notes are created out of debt, money that pays interest. With inflation, debt becomes cheaper to repay over time.  What the FED is deathly afraid of is serious deflation, which results in people being unable to repay debts.
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Eddie_T
Eddie_T
5 years ago
Reply to  RonJ
That’s it in a nutshell, if you ask me. 
They say that generals are always trying to fight the last war. The Great Depression is always there in their minds….and surely they even know by now that their bubbles make a new depression likely….but they have no choice but to keep inflating the bubbles and hope they’re out of it before the reckoning comes. Otherwise it could happen immediately. Musical chairs. Gotta keep the music playing no matter what.
Taper talk is mostly just talk now. Everybody gets that, and nobody is fooled. This creates huge risk I think, and much more so in the higher risk assets than in tangible assets, which can get hammered, but never driven to zero.
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caradoc-again
caradoc-again
5 years ago
Does anyone supposedly running the show know what they are doing or have the balls to do what needs to be done?
Fundamental failures leading to a breakdown in the economy and society.
Where is there proper, principled leadership?
This is how countries fail and societies collapse.
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Eddie_T
Eddie_T
5 years ago
Reply to  caradoc-again
Great questions.
“Does anyone supposedly running the show know what they are doing?”
A few.
“or have the balls to do what needs to be done?”
Probably not, no. And….they think what they’re doing now is working….but it only works until one day it stops working.
“Where is there proper, principled leadership?”
Singapore? Not here and not in Europe either.
“This is how countries fail and societies collapse.”
I care more about the way the scheme punishes prudent behavior and rewards risk-taking…which is typically very hard on ordinary people. I try to figure out ways to invest and also how to hedge these big risks…..but there is no risk free path to wealth anymore. This is not the world of Benjamin Graham and Warren Buffett. It’s different and has different rules, imho.
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RonJ
RonJ
5 years ago
Reply to  caradoc-again
There is a cycle. The Romans built an Empire, then it declined and fell. When the Soviet Union fell, the U.S. became the only Super Power. Standing on the top of the mountain. The only direction left, was down.
China was an empty economic vacuum. After Mao died, China opened the door and U.S. manufacturing rushed in.
It totally reversed the U.S. becoming the producer to the world, after WW2. Cycle up, cycle down. Attitudes change as the phase of a cycle changes.  Things became fat and happy on the way up, but a shrinking indebted empire, can’t provide the bread and circuses of the good times, any more. People get grumpy.
The WEF has a plan called the Great Reset, and their slogan, Build Back Better. Biden, Trudeau and Johnson are all using it. You will own nothing and be happy. Equity.
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Doug78
Doug78
5 years ago
Reply to  RonJ
Just like Rome we too will fall. It is up to us to push that date as far out as possible.
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Eddie_T
Eddie_T
5 years ago
Reply to  Doug78
I’m guessing our ruins won’t be nearly as interesting 
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anoop
anoop
5 years ago
i’ve been waiting for teevees to drop low enough in price to buy one.  i’ve waited 21 years and i’m prepared to keep waiting till they stop falling in price.
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ed_retired_actuary
ed_retired_actuary
5 years ago
Macro economist consensus is that monetary policy acts with large and highly variable lags, which creates the likelihood of natural cyclical (e.g. boom bust) inflationary and economic outcomes.  A competent Fed would counter-act this dynamic by promptly responding to anticipated economic trends with counter-cyclical policy.  Instead the Fed’s current policy is not to ease extreme stimulus until increased inflation and economic recovery is staring it in the face, and then to do so with a lag to warn markets, and then very gradually.  This further exacerbates the lag impacts, greatly increasing the risk of high persistent inflation, followed by a severe recession when the Fed eventually tightens greatly as then.   needed to prevent inflation from spiraling out of control.
Inflation expectations may not matter much under normal circumstances, but they could become important if consumers and investors generally lose confidence in their fiat currency.
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Eddie_T
Eddie_T
5 years ago
I just watched a pretty decent video by one of the better RE content guys on YT, that shows (using median income, current median housing prices, and considering the current low interest rates) that housing could theoretically triple in price from here and not keep people out of the market. This is a data driven analysis, based on the last fifty years of data, looking at affordability.
Bubbles do pop, but they can blow up more than you think, too.
FYI
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SHOfan
SHOfan
5 years ago
Reply to  Eddie_T
Eddie,
Thanks for the video, it is a good learning tool.  The clip is interesting, but unrealistic.  The analysis is suggesting people can buy a house that is 13 times income.  4 or 5 times has historically turned out to be more reasonable.
Banks historically used 28% of income for a reasonable mortgage payment.  36% including all debt.  So, 40% for a mortgage payment would have very high default rates.
Also, a family does not have all their income available to calculate that payment ratio.  Payroll taxes disappear from that $80k.
How many families would be able to come up with a down payment greater than a year’s income? 
The author has taken a single data point: 39% and done the entire analysis to fit that, assuming that everything would be fine. 
His analysis does not address taxes and insurance which would be high and increasing every year.  The home would become less affordable every year.  Also, they would have no money left to save and invest, making the property even less affordable, as they age.
Interesting, but not very realistic.  I enjoyed watching it, anyway.
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Eddie_T
Eddie_T
5 years ago
Reply to  SHOfan
It’s meant more to show that the current perception is wrong about affordability than it is to show that an actual 3X from here is in the cards. I don’t think that’s gonna happen either.
But to address the issues you point out…..FHA has lowered the downpayment requirement many times….it started with the addition of PMI insurance in 1956. Before that, the 20% down rule was real and it came from the idea that if the loan went into default, the bank could quickly foreclose and sell the property immediately for a 20% discount and move on, without losing money.
PMI made it possible to do 15%. Now, a little more than half a century later, FHA loans can be had for 3.5% down. This is only possible with government guarantees and PMI of course..but that’s all a 1st time home-buyer with decent credit has to come up with if the house qualifies for FHA…..and now the government is discussing GIVING downpayment to 1st time homebuyers.
It’s a conduit scheme, of course, that benefits the MBS market and the big homebuilders..but I would not be surprised to see FHA go to no money down in an attempt to “increase equity” for communities that have suffered from  systemic racism and things like that.
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Eddie_T
Eddie_T
5 years ago
Reply to  SHOfan
One more thing.
“Also, they would have no money left to save and invest, making the property even less affordable, as they age.”
Do you have any idea how much leverage you get with a 3.5% downpayment?  It starts at  100/3.5= 28.57 and as the years pass it gets even higher, as the loan is amortized, because more of the payment goes to principal.
If you can think of ANY other investment that can be made using that much leverage and still maintaining the relative safety of a government guaranteed mortgage loan, I’d like to know what it is. 
I will say that a 3.5% DP sets borrowers up to be bag holders if they buy at the top of a bubblicious market like we’re in now. But if you can ride it out until you get to 20% equity, history shows you won’t be likely to ever end up upside down after that.  Being able to service the debt is the big risk on the front end, more than a loss of equity.
People worry about being upside down, but if history is a go-by, upside-down borrowers are almost alway made whole eventually if they make their payments. That is true on average,. There are always pockets of poverty  that are demographic wastelands where prices don’t recover, of course.
My own kid bought her first house in 2015 with a 3.5% downpayment. Her equity has come up so fast that she has about 50% equity in six years time, too, so she’s past what I consider the danger zone now, in terms of being upside down. In a less crazy market, it might have taken 10 years to get to 20% equity… 
But at what teachers get paid, she will NEVER make a better investment, most likely…..and it’s the leverage. The liability is as important as the asset.
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Doug78
Doug78
5 years ago
Reply to  Eddie_T
Interesting video. It hinges on interest rates falling even from here which might happen or might not. My long life has taught me that things I thought were given often were not but in his scenario the math basically works out. Excel is great for “what if” calculations. I fear that he is extrapolating out current conditions which have been in place for ten years. The future will certainly surprise us. 
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Eddie_T
Eddie_T
5 years ago
Reply to  Doug78
I think Michael is responding to the current meme on YT among influencers,  many of whom are predicting a huge crash in the short-term future.  In general, in the world of social media, crash predictions are great for generating clicks and the revenue that comes from attracting views.
I can point out pundits who have been calling for a crash continuously since 2009…and although they’ve been wrong over  and over, they remain popular and do influence a lot of people. Being interested in gold, I’ve seen that play out over decades now. 
I think it’s good to watch a video like that one, even if it is flawed, to see that a market collapse is often less imminent than the street-corner YT pundits want to claim. I’m not sure if they even believe their own doom and gloom. some of them make a lot of money off doom and gloom.
It’s not that different than the prevailing meme that Cina is about to take over the world ,and the US is toast. It’s a popular opinion….but it isn’t necessarily the correct one,
I’m a believer in using leverage….but the problem is that leverage usually cuts both ways, and you can lose your @ss if you don’t respect that and understand it. Don’t ask me how I know that. But I think mortgages are safer leverage than most  other ways you can leverage.
I would never use 5:1 leverage  for a stock trade or a precious metals trade. But if it’s your house, and you can live in it, and pay the monthly payment and the insurance and the taxes without going broke….that leverage will, speaking at least in general terms, only work for you, not against you.
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Eddie_T
Eddie_T
5 years ago
Reply to  Eddie_T
“China”, not Cina. You know what I meant.   🙂
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Doug78
Doug78
5 years ago
Reply to  Eddie_T
At the firm we had a well-known economist that would talk to clients. He was wrong 80% of the time but that didn’t matter to the clients because he could put on a real show, communicate enthusiasm and generally the clients liked him. I asked one why and he said that normally the economists and strategists  they talk to are rather boring and when our guy came along it brightened up the day.
RE gives great leverage with not much downside as long as you can make the payments as you said. For me it is not my principle investments, those are stocks, but I bought a house as soon as I could, traded it up a few times and added a vacation home. It is a very good investment.
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