Our Long-Term Outlook on Inflation Improves

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Three years from now, will we look at today’s soaring prices and think of it as the bad old days? It seems more likely, if consumers’ own expectations are any gauge. 

When asked to predict what the annual inflation rate will be three years from now, those surveyed by the Federal Reserve Bank of New York each month have grown a bit more optimistic. 

As the chart below shows, the median expected inflation rate three years from now dropped sharply to 3.5% in the latest poll—less than half what it actually is today, although still above the 2%-3% inflation rate people expected back before the pandemic. The same survey projected an improvement in the inflation rate one year from now too, marking the first time that’s fallen since October 2020.

Economists are eager to know what the public thinks will happen with inflation because expectations can be something of a self-fulfilling prophecy. For example, if people think inflation is going to continue to go up, they’ll respond by doing things that make inflation worse, such as buying more stuff before it gets more expensive, or raising prices they charge, if they own a business.  

Inflation has soared to 7.5%, the highest in almost 40 years, mainly because of the pandemic’s disruptions to the economy. And an analysis of how sensitive people are to inflation news and surprises showed people are less reactive now than before the pandemic, particularly when it comes to their longer-term outlook, economists at the New York Fed wrote in a blog post. 

The NY Fed’s survey polls the same people over time; 1,300 heads of household, making up a nationaly representative group, participate for up to 12 months, with a roughly equal number rotating in and out each month.

Have a question, comment, or story to share? You can reach Diccon at dhyatt@thebalance.com.

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