Inflation: Expectations Matter

September 29, 2022

Three-line chart showing the CPI and CPI forecasts. Chart subtitle: According to the Survey of Professional Forecasters, long-term inflation expectations are rising for the first time in decades. Chart visual description: Y-axis is labeled Year over Year % Change and ranges from 0% to +10%. X-axis shows dates ranging from September 2012 to September 2022, in six-month increments. Purple line represents CPI (monthly data); light grey represents SPF 5-Year CPI Forecast (quarterly data), and darker grey line represents SPF 10-Year CPI Forecast (quarterly data). Note that CPI is as of August 2022. Chart data description: Both the 5- and 10-year forecast lines generally hover just slightly above or below 2% until recently, with the 5-year line ticking up to 4% for September 2022 and the 10-year line to 3%. Actual CPI has been typically been less stable than forecasts, though rarely above either forecast. Since March 2021 however, CPI has climbed significantly, peaking in June of this year near 9% and as of August, just below that at 8%. Chart source: Federal Reserve Bank of Philadelphia Survey of Professional Forecasters - Third Quarter 2022. End chart description.

The announcement of another 75 basis point rate hike at last week’s FOMC meeting reaffirmed the Federal Reserve’s unwavering commitment to reducing inflation. One of the key variables the Fed watches to help it determine the path of rates is expected inflation. Inflation can become a self-fulfilling prophecy if consumers start pricing future inflation into their decision-making and businesses start making anticipatory adjustments to their prices and behavior. To combat this, the Fed strives to anchor expectations around a 2% target inflation rate. When long-term inflation forecasts deviate from that 2% target it means inflation expectations are not well-anchored, i.e., people believe that a short-term rise in inflation could lead to higher price levels longer-term.

Inflation expectations have moved further away from the 2% target over the course of 2022, something the Fed recognizes as a potential roadblock in navigating the current inflationary environment. Indeed, Fed Chair Jerome Powell stressed the importance of “expeditiously continuing to raise rates” to “ensure that longer-term inflation expectations remain well-anchored” at the June FOMC press conference.¹ With higher-than-anticipated August CPI figures, however — headline inflation of 8.3% and core inflation that reaccelerated to 6.3% — inflation expectations may remain higher for longer. Headline inflation is moving in the right direction, but core inflation, which remains well above Fed targets, tends to be stickier and may further complicate the Fed’s task. While there are no crystal balls, longer-term inflation expectations will continue to bear monitoring as investors search for potential indicators of a market bottom.

Print PDF > Inflation: Expectations Matter

¹ Lee, J., Powell, T., & Wessel, D. (2022, June 27). What are inflation expectations? Why do they matter? The Brookings Institute. Retrieved September 28, 2022.

 

The opinions expressed herein are those of Marquette Associates, Inc. (“Marquette”), and are subject to change without notice. This material is not financial advice or an offer to purchase or sell any product. Marquette reserves the right to modify its current investment strategies and techniques based on changing market dynamics or client needs.

The opinions expressed herein are those of Marquette Associates, Inc. (“Marquette”), and are subject to change without notice. This material is not financial advice or an offer to purchase or sell any product. Marquette reserves the right to modify its current investment strategies and techniques based on changing market dynamics or client needs.

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