Investors and consumers overestimated the inflation rate over the last decade
REUTERS/Robert Galbraith
St. Louis Fed economist Kevin Kliesen compared two measures of consumer and investor inflation expectations to actual inflation rates. For consumers, he looked at a monthly household survey run by the University of Michigan that asks respondents what they think the rate of inflation will be over the next five to ten years.
To get a sense of investor and market expectations for inflation over the next few years, Kliesen used the standard "5-year 5-year breakeven" rate. This measure is based on the difference between the yields of normal 5-year US treasuries and of inflation-protected treasuries. The price premium investors are willing to pay for the inflation-protected bonds is a good indicator of the market consensus on inflation expectations.
Kliesen then compared those inflation predictions to the actual rates of CPI inflation five years later. Both consumers and investors predicted higher inflation than actually happened, with the consumers having a worse track record.
Kliesen also notes that the time period spanned by the study, using expectations data from January 2003 through the fall of September 2007, came right before the financial crisis and Great Recession, and that these events lead to a period of lower inflation than would have been expected earlier in the decade.
This chart, summarizing Kliesen's main result, shows the consumer inflation expectations in blue, the market expectations in red, and the actual inflation rate five years later in grey:
NOW WATCH: How your phone tracks your every move
- A centenarian who starts her day with gentle exercise and loves walks shares 5 longevity tips, including staying single
- A couple accidentally shipped their cat in an Amazon return package. It arrived safely 6 days later, hundreds of miles away.
- FSSAI in process of collecting pan-India samples of Nestle's Cerelac baby cereals: CEO
- 7 Nutritious and flavourful tiffin ideas to pack for school
- India's e-commerce market set to skyrocket as the country's digital economy surges to USD 1 Trillion by 2030
- Top 5 places to visit near Rishikesh
- Indian economy remains in bright spot: Ministry of Finance
- A surprise visit: Tesla CEO Elon Musk heads to China after deferring India visit