Consumers Are Way Off Base About Inflation

I was over at the Conference Board site checking out consumer sentiment, and I was unsurprised to find that it’s pretty dismal: down from 98 in June to 92 in July. There’s not much to say about this aside from “what else would you expect?”

But then I browsed through the whole news release and came across something I hadn’t seen before: expectations of future inflation rates. What caught my eye is that in July the average expectation in the Conference Board’s survey for inflation one year from now is 6.1 percent. Yowza! We haven’t had inflation that high for 30 years, and over the past twelve months it’s been running at about 2 percent. Here’s a comparison of survey expections with expectations based on bond prices put together by the Cleveland Fed:

As I said, I’ve never seen this before so I’m not sure what to make of it. But what it says is that no matter how long inflation has been low, ordinary consumers insist on believing that it will go up to 4-5 percent any day now. And if something bad happens, it will go up to 6 percent.

I’m trying to think of what effect this has. What are the upsides and downsides of consumers thinking that inflation is far higher than it really is? They’ll probably feel cheated by a 3 percent raise or a 2 percent return on their savings. On the other hand, they might increase their spending if they think their money is losing value and there’s nothing they can do about it.

What else? I’m a little fuzzy this morning, but there must be more profound consequences of this disconnect.

HERE ARE THE FACTS:

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ONE MORE QUICK THING:

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As we wrote over the summer, traffic has been down at Mother Jones and a lot of sites with many people thinking news is less important now that Donald Trump is no longer president. But if you're reading this, you're not one of those people, and we're hoping we can rally support from folks like you who really get why our reporting matters right now. And that's how it's always worked: For 45 years now, a relatively small group of readers (compared to everyone we reach) who pitch in from time to time has allowed Mother Jones to do the type of journalism the moment demands and keep it free for everyone else.

Please pitch in with a donation during our fall fundraising drive if you can. We can't afford to come up short, and there's still a long way to go by November 5.

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