Good news on inflation is hard to find these days, but the expectations of financial markets and consumers are reasons for optimism. Both see inflation falling, or at least not getting worse. They expected inflation to rise until a few weeks ago, so this turnaround is new.
Why it matters: When consumers, businesses, and financial markets expect inflation to rise, they act in ways that raise prices. This can create feedback loops that drive inflation higher.
Be smart: Expectations for long-run inflation rose sharply from February through March, then leveled out through late April. Since then, they have come down to where they were in February and March.
- According to the University of Michigan’s Consumer Sentiment survey, consumers have “anchored” their inflation expectations, meaning they don’t see inflation taking off further.
Looking ahead: This change in expectations could be because of changes in Fed policy—raising interest rates. If that’s the case, and expectations continue to decline, we will see inflation drop through the rest of the year as financial markets and consumers’ behavior mimics their expectations.
—Curtis Dubay, Senior Economist, U.S. Chamber of Commerce