A New Way to Measure Inflation Expectations Has Bad News

Federal Reserve policymakers believe that inflation expectations are self-fulfilling prophecies, and they’re dead set on preventing them from moving materially higher. But expectations are hard to measure in real time, and the most popular household surveys are limited by respondents’ often poor understanding of what inflation truly is. They may confuse price levels with inflation (a rate of change), and they tend to over-extrapolate from a few narrow experiences at the gas station and the supermarket.

Of course, economists and survey architects are aware of these shortcomings, and there’s been considerable enthusiasm around the idea of making the questions more intuitive and personal. Morning Consult, in work with economists from the Federal Reserve Bank of Cleveland, introduced a survey question last year that asks consumers how their incomes would have to change to make them “equally well-off,” given their expectations about prices in the next 12 months. In the past couple of weeks, the Morning Consult metric — drawn from weekly surveys of 20,000 people on average — jumped to a record. I spoke to John Leer, chief economist at the decision intelligence company, about the recent data. A lightly condensed and edited transcript of the conversation follows.

What is your indirect consumer inflation expectations gauge telling us?

For the second week in a row, we’ve had really record high inflation expectations — up to 8.25% for the week ending this past Saturday, up from 8.02% the week prior. This in many ways sort of bucks the trend that we’ve seen over the last two months where we saw basically a lot of volatility that essentially resulted in instability. And now we’re clearly seeing a turning point with elevated inflation expectations. … It’s hard to refute now — after having two consecutive weeks, 20,000 survey respondents per week — that 12-month inflation expectations are elevated.