Inflation expectations are the highest since 1981. Stagflation anyone?
Sentiment Down Fourth Month
The University of Michigan reports Consumer Sentiment Down Fourth Month
Consumer sentiment fell for the fourth straight month, plunging 8% from March. While the April decline in current conditions was modest, the expectations index plummeted with drop-offs in personal finances as well as business conditions. Expectations have fallen a precipitous 32% since January, the steepest three-month percentage decline seen since the 1990 recession. While this month’s deterioration was particularly strong for middle-income families, expectations worsened for vast swaths of the population across age, education, income, and political affiliation. Consumers perceived risks to multiple aspects of the economy, in large part due to ongoing uncertainty around trade policy and the potential for a resurgence of inflation looming ahead. Labor market expectations remained bleak. Even more concerning for the path of the economy, consumers anticipated weaker income growth for themselves in the year ahead. Without reliably strong incomes, spending is unlikely to remain strong amid the numerous warnings signs perceived by consumers.
Year-ahead inflation expectations surged from 5.0% last month to 6.5% this month, the highest reading since 1981 and marking four consecutive months of unusually large increases of 0.5 percentage points or more. This month’s rise was seen across all three political affiliations. As seen in the chart, inflation expectations evolved with major trade policy announcements this month. After the April 9 partial pause in tariff increases, inflation expectations ebbed but remained substantially elevated relative to March. Long-run inflation expectations climbed from 4.1% in March to 4.4% in April, reflecting a particularly large jump among independents.
Inflation Expectations Highest Since 1981
The above chart does not appear to match the report, but that’s because it a daily chart not the final monthly reading.
To repeat … “Year-ahead inflation expectations surged from 5.0% last month to 6.5% this month, the highest reading since 1981 and marking four consecutive months of unusually large increases of 0.5 percentage points or more.
Do Inflation Expectations Matter?
I have repeatedly made the case, no they don’t, and I am not changing my tune here.
However, the Fed disagrees (despite massive evidence from their own studies), and their opinion matters more than any facts.
The Fed will be particularly wary of long-term expectations and this statement “Long-run inflation expectations climbed from 4.1% in March to 4.4% in April, reflecting a particularly large jump among independents.“
Inflation Expectations Don’t Matter
Every FOMC meeting the Fed Chair, currently Jerome Powell, makes a fool of himself with nonsensical discussions on inflation expectations.
How can they matter? If you do think they matter, then answer this simple Q&A.
Consumer Inflation Expectations Q&A
- If you think the price of rent will jump next year, will you rent two houses now to beat the rush?
- If you think the price of rent will fall next year, will you hold off renting until rent falls?
- If you think the price of medical care will jump next year, will you have two operations now to beat the rush?
- If you think the price of medical care will fall next year, will you hold off on a needed operation?
- If you think the price of a vacation will jump next year, will you have two vacations this year and none the next?
- If you think the price of a vacation will drop next year, will you have no vacations this year and two the next?
- Will you stop eating? Eat more?
- If you car breaks down will you fix it twice? Wait until next year?
OK, maybe you wait for a sale to buy a coat. But you probably don’t by two. And if your coat rips, and you need one, you may not wait at all.
You can’t do much about electricity bills, home insurance, auto insurance, or gasoline.
Up and down the line there is not a damn thing you can do about 90 percent of what you buy. Rent alone is 35 percent of the CPI.
Businesses Inflation Expectations
Grocery stores can’t do anything at all, for obvious reasons.
Manufacturers can order ahead, and did to beat tariffs, but now they now have big inventories.
How many cars can dealers fit on their lots? And what if consumers don’t buy?
Dealers can only hold a few month’s inventory, assuming storage space, but at a cost and risk of declining prices if consumers throw in the towel.
Fed Study Agrees
No study should be needed to prove the logic of what I just stated. However we do have a study, and it’s by the Fed.
Why Do We Think That Inflation Expectations Matter for Inflation? (And Should We?)
Please consider Why Do We Think That Inflation Expectations Matter for Inflation? (And Should We?) by the Federal Reserve.
Mainstream economics is replete with ideas that “everyone knows” to be true, but that are actually arrant nonsense.
The direct evidence for an expected inflation channel was never very strong. Most empirical tests concerned themselves with the proposition that there was no permanent Phillips curve tradeoff, in the sense that the coefficients on lagged inflation in an inflation equation summed to one.
Finally, even if one is willing to entertain the idea that in some vague, mushy sense concern over costs and demand by individual firms facing fixed prices leads to a dependence of aggregate inflation on expected inflation, we are still left with the conclusion that short-run expectations should be the ones that are most important.
One might also be uneasy about policymakers’ relying too heavily on the assumption that inflation’s long-run trend will remain stable going forward so long as measured long-run inflation expectations do. Even if every one of my preceding arguments is judged by the reader to be completely unconvincing, it nevertheless remains the case that we have nothing better than circumstantial evidence for a relationship between long-run expected inflation and inflation’s longrun trend, and no evidence at all about what might be required to keep that trend fixed (beyond that it might involve keeping actual inflation from moving up too much above two percent on a sustained basis).
[Mish note: The lpreceding two paragraphs are a direct criticism of Fed policy as practiced by every Fed chair and people dismiss these reports without reading. The next paragraph is a hoot as well.]
Or would you justify the view that expectations “matter” by pointing to the inflation experience of the 1960s and 1970s, even though that period provides no actual evidence that workers or firms tried to boost their wages or raise their prices in anticipation of future price or cost changes?
Amusing Quotes
- Expectations are by definition a force that that you intuitively feel must be ever present and very important but which somehow you are never allowed to observe directly: R. M. Solow (1979)
- Pure economics has a remarkable way of pulling rabbits out of a hat. It is fascinating to try to discover how the rabbits got in; for those of us who do not believe in magic must be convinced that they got in somehow: J. R. Hicks (1946)
- Don’t interfere with fairy tales if you want to live happily ever after: F. M. Fisher (1984)
- Few things are harder to put up with than the annoyance of a good example: Mark Twain, The Tragedy of Pudd’nhead Wilson (1894
Do Inflation Expectations Matter?
I have discussed inflation expectations at least ten times over the years.
Here’s one from 2023 when I tangle with Bill Fleckenstein regarding the question How Do Inflation Expectations Impact Wages and Future Consumer Inflation?
Fleckenstein is an inflation expectations believer.
Phillip’s Curve Nonsense
Also see Yet Another Fed Study Concludes Phillips Curve is Nonsense
Despite the Fed’s own studies, every Fed president still believes in the Phillip’s Curve and Inflation Expectations.
They have been trained to believe nonsense.
Asset Price Expectations
Asset price expectations are another matter. That’s why we have bubbles and crashes.
People will buy houses and stocks if they think prices will rise. People don’t by stocks if they think they will fall.
But asset prices are not in either the CPI or PCE price indexes. Fostering asset prices bubbles is a constant mistake by the Fed.
The one place expectations do matter is in asset bubbles, and it’s the only place the Fed doesn’t look!
Inflation Expectation Reality
Inflation and media reporting of it drives expectations, not the other way around.
That’s a good thing for the Fed right now, even if the Fed is too clueless to believe the obvious (and their own studies).
However, doesn’t matter doesn’t mean won’t happen. No one knows what Trump will do. So no one can rule out stagflation or asset bubble deflation, or anything in between.
The dynamics of demand being driven forward by the fear of shortages should be factored in along with the sharp drop in loadings of goods from China. It would likely follow that prices may actually fall for a short period of time and then (if) shortages hit, prices may rise quickly as the Fed drops its rates and helicopters money back into the market during another shortage of goods.
Bubble whiplash is likely with the trump disruptions of all markets and business being able to plan ahead.
Assets prices can and will fall if the consumer hits the brakes hard.
Everything I have is paid for and I really do not need to buy anything. Maintenance will be key to continued production on the farm.
Planting a big ass garden this year and staying home as vacations are logistical nightmares and foreign travel too risky as violence on “American” tourists is raising its ugly head. After all WE are the ones that put this douchebag in office!
Elections have consequences!
There are about a dozen items that I buy frequently on Amazon (supplements, specialty foods) and they are almost all currently on sale. They had gone up a lot over the past few years; maybe in this new worrisome economy their customers are balking.
It depends how long Trump dangles the economy by a string. He may reach a point where he stops and declares some tangible victories (compared to Birdbrain Biden record such as on trade deficit and % increase in manufacturing jobs).
My best guess is he’ll do this until no later next April so he can show +12 months of progress such as with the DOGE, etc. Then promote that progress going into midterm election in 2026.
Progress? What progress?
Trump is a liar that only carnival suckers trust. No one is talking to him and he is twisting in the wind of his own brain farts! World trade is not a carnival, it does not function well with an orange haired clown in a pivotal role of government. Production takes serious planning and management to bring plants and mass production on-line. Distribution channels must be reliable and trump is not reliable, he is erratic.
Trump can lie to himself and his TDS II minions. Leaders of major nations and large corporations are not buying trumps delusions, calling to negotiate or “kissing his ass”. There is no reason to as he is nothing but a gas bag.
Careful where you light a match!
Yeah I was reading the bed tax reports for last few months for the Bay County Tourist Development Council. Looks like it is down compared to 2022, 2023 and 2024 :-/
Well yeah.. I got a couple weeks of vacation coming up and there isn’t anywhere worth visiting where you can get a room for less than $225 plus pet fee for us nightly.. all the money printing spread like I believe the saying is helicopter money has made everything unaffordable.. just an observation from the working class I’ll be interested to see what kind of tourist season the country has if any real austerity…
Inflation expectations matter for durable goods. If you’re thinking about replacing your fridge that’s working but is a little wonky and expect prices to go up in the next few years, then you might as well bite the bullet and but a new one now than later.
These are a miniscule numbers of cases and they happen precisely once.
Cleaning out dust and debris underneath around the coils and in the back by the fan does wonders. A wonky non-‘stainless steel ‘ clad fridge told me so.
Of course that doesn’t help the GDP on “durable” goods sales.
The US reversal, chaotic confused policies of the 1st 100 days are planting the seeds for the next 450 days before the midterms. It will be a bloodbath.
You should get some new chicken bones to throw.
I thought you told us this week was going to have a market crash due to fractals?
The 3 Feb 2025 819/20/13 day fractal series (not correct) is interpolated in a larger 13 January 2025 13/30/31 of 33/20 day fractal series with a lower high on 29 April and an incipient crash low on 27 May 2025 and a final low in Dec 2026
The tariffs will untimately be deflationary. The inflation rate actually went down after the 2018 tariffs.
Just viewed 4 auction [3 of which are in pre-bid mode] AND NO SLOWDOWN in bidding. Two of those are in MI [negating much of this survey] Plenty of money in MI [we’ve a lot of well off retirees from the Big 3; hence nice pensions n SS…in Detroit/Flint plenty of folks still getting their welfare n food stamps [most have side hustles too],,,ergo, no real shortage except among Middle Class workers w/ kids.
Perhaps this is one of those times where inflation expectations do matter. So many stories of folks making purchases now before prices go up because of tariffs; autos, electronics, appliances, clothing, etc.
Same for businesses which import oil, steel, aluminum, potash, lumber etc.
Trump’s whole economic agenda could well be summarized by: Make Inflation Expectations Great Again. What a show! (As somebody on this website likes to say.)
Until inflation is reversed no recovery of any kind is possible.
Inflation causes depression. Since the brief real estate crash in the 90’s the fed has pumped in untold trillions of inflation to maintain and push asset prices ever higher. .
Not everything has gone up in price. We live in KS. Gas is $2.48 for super premium. We’re traveling now. I can’t believe how many states have gas at over $3 a gallon. We’re in UT now. Gas is the highest here so far on our trip.
You may soon be able to enjoy gas below $2.00. Trump is working hard to get us there (via an economic crash).
Oh you have a real treat coming your way when you cross the state line into California.. $3 a gallon I think that was 25 years ago here.. and we still have some of the worst roads in the country
I won’t ever go to CA again. I refused to drive through CO on our way to UT. I’ll never go to any blue sanctuary states again except IL to visit family for a couple days. I refuse to give my money to those lunatics on the left. We moved from IL to KS to get away from their crazy politics and high taxes. KS has a Democratic governor but a super majority of Republicans in the house and senate so they can always over ride her vetoes.
The amount of money needed to be spent in CO is minimal compared to the great scenery.
RBOB price is not what gas stations charge after taxes in their specific locales. Also that ‘seasonal blend’ changeover nonsense in parts of the country.
UMich or You, Mish?
The distributed lag effects of monetary flows, the volume and velocity of money, are mathematical constants. Economic prognostications within a year are infallible. Inflation is headed higher. Sept. is still the peak. The bubble in home prices won’t collapse until after Feb. 2026.
Infallible? Yeah, no.
It takes a lot of disturbing factors to alter the course. Economists are just stupid.
There is an old saying among macroeconomists that price stability is defined as a situation where inflation expectations don’t matter. When Powell and the Fed are discussing inflation expectations, that’s exactly the insight they have on their minds. If anybody on this site has been around in the US in the 1970s or in countries without price stability, they will know that in those unstable situations inflation expectations are almost the only thing that matters economically and politically.
Thank you president trump for your “make america great again” program.
I’m noticing the prices on Amazon going up.
Anecdotally, I went to a local shoe store this past Wednesday afternoon and the store was mobbed (on a Wednesday?). 2 long lines to check out.
Lots of kids so it felt like back to school shopping time. Nope, just panic buying.
Run a 3:42 mile and get yourself a Nike shoe contract.
I am stocking up as much as I can. Bought an additional bag of rice. Rice lasts a long time. And I got all the shoes I need with a few back ups since shoes are most if not all are made ‘over there’ Batten down the hatchets and good luck to all of you!
You need to vacuum seal and freeze the rice. After two or three months, the rice beetles hatch out otherwise.
I bought a few pairs of shoes and a couple pairs of jeans and other clothing items too. I need to hurry and get a laptop. Everyone else is frontrunning the tariff tax. The cheaper laptops are always sold out in stores. I’ll probably order one online.
I had an open box of minute rice in my cabinet opened for over a year. I ate some. Tasted the same.
An extra bag of rice? A 10 lb bag of Walmart brand costs like 4 bucks. Name brand like 8 bucks.
So if this bag rises in cost by 20% (a very high number) you save 40 cents to 1 dollar. Is that seriously going to matter?
It’s panic buying that causes CPI inflation, not tariffs. Goods trade at the price at which they are able to clear. In other words, a buyers strike would result in lower prices, tariffs or no tariffs.
Once again, downvoted for stating an economic fact.
When Ford and GM will move production back home Michigan unemployment might
drop from 5.5% to 3.5%/4.5%. Satellite factories will rise all over the midwest. UAW and Mary Barra want to consolidate.
Actually, many manufacturers are considering moving production out of the US to avoid paying tariffs on their inputs of steel, aluminum, equipment and parts. Particularly if a lot of their production is exported.
This is correct
You forgot the sarcasm tag.
The Netherlands is gearing up for WWIII, so some steel production will move that way, until it’s submerged.
“Grocery stores can’t do anything at all, for obvious reasons.”
I’m not so sure about that. Look at sales ads that are mailed weekly. Eighty percent plus of all items are rounded to dollar amounts. In my area, only 20% of advertised items are not rounded to whole dollars (well .99, but pretend the extra penny). Whenever meat prices change now, they change in dollar increments. Get rid of SNAP, and that situation would likely be forced to change.
The obvious reason was grocery stores cannot stockpile months’ worth of meat, fresh vegetables, frozen vegetables or anything that can spoil.
So care to think again.
Point taken. I’m just saying the price points do not indicate any sort of lack of demand. Prices in sales ads would at least be rounded to the neatest quarter, in an even distribution, if people had to be careful about their spending. The fact that stores round 80%+ of their items to the nearest dollar shows “pricing power”, commonly known as the ability to gouge. Also, prices on the meat clearnce items in-store are not rounded to the nearest dollar.
That’s an awful lot of downvotes for stating basic ideas found in every economics book. I think there is a lot more tribalism/”feeling” going on rather than thinking.
Do you people never look at weekly sales ads?
https://www.vons.com/weeklyad
It’s the same phenomena for *every* grocery chain in my area.
Grow your own squash.