One of the most important signals of future inflation has begun to ease in the past month, a development that should reassure the Federal Reserve in its prediction that the recent inflation surge will prove largely temporary.
That signal is so-called inflation expectations: what businesses, consumers, workers and investors expect inflation to be over the next one to 10 years. Because such expectations can be self-fulfilling, economists consider them key to where inflation is going.
Expectations are tracked through a range of surveys and market-based measures, and most are telling the same story. After rising sharply from October through May, they have now begun to ease.
The median expectation of inflation during the next year for consumers surveyed by the University of Michigan shot to 4.8% this month, the highest since August 2008. However, consumers’ one-year expectations are strongly influenced by today’s inflation rate, now a 13-year high of 5.4%. A more-reassuring message comes from their expectations for five to 10 years from now: That came in at 2.9% in early July, down slightly from 3% in May and close to the average of 2.8% in surveys from 2000 to 2019.
