High Inflation Is Now Seen As The New Normal

(NationalUSNews.com) — According to the October Survey of Consumer Expectations, Americans are expecting 3.6% inflation over the next year. This is significantly higher than the average of 2.6% that they expected in 2019, but on par with their expectations in 2022. However, inflation expectations and actual inflation results can result in complex, inter-related outcomes. For instance, workers who are expecting higher inflation may demand higher pay, and consumers who expect that inflation will make things even more expensive in the future may be willing to pay higher prices now.

Economists generally agree that the long-term outlook for inflation will trend higher than it did before the pandemic. The Survey of Professional Forecasters shows that the median forecaster is seeing a 2.5% increase over the next five years for PCE inflation, up from 1.9% in 2019. PCE refers to the PCE price index, which is known for capturing inflation or deflation across a broad range of consumer expenses, helping to describe changes in consumer behavior. The median forecaster per the Survey of Professional Forecasters also foresees inflation falling to 2% 10 years from now.

The bond market is more optimistic about the inflation outlook, suggesting 2.3% annual inflation over the course of the next five years. However, the bond market focuses on the Consumer Price Index (CPI) instead of PCE inflation, and CPI runs higher than PCE inflation, so it is not necessarily directly comparable. The CPI is a group of indexes that measure price changes as experienced by urban consumers. These indexes specifically refer to the average change in price of various consumer goods and services over time.

The chief economist at Wilmington Trust Investment Advisors, Luke Tilley, has expressed concern that as inflation expectations drift ever higher “the Fed absolutely will act”. He believes that the Fed is being too pessimistic about its forecasts for inflation. MetLife Investment Management’s chief market strategist, Drew Matus, says that it is important to the Fed that people do not “expect inflation will run at 4% forever”. He believes that the pessimistic view of inflation held by the public is based on nostalgia for the past, which people have romanticized as a time “when things were more affordable.”

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