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Time to unburden ourselves of a long-withheld complaint ahead of this Thursday’s release of the January CPI numbers.
Here’s a chart comparing 12-month inflation expectations in the Reuters/University of Michigan consumer confidence survey (updated last Friday) against actual 12-month changes in the CPI (both headline and core):
If the expectations in the UMich survey (the blue line) were prescient, you would expect to see the headline CPI numbers (red line) take a similar shape, but with a one-year lag.
Instead what you see is a status quo bias on the part of consumers at the onset of the crisis — with 12-month expectations of more than five per cent inflation through the middle of 2008 — followed by a perpetual overestimation since.
Here’s what the The Wall Street Journal wrote on Friday about the survey:
How can households be more hawkish about inflation than the Fed?
Much of the dichotomy reflects which prices are in focus. The Fed and economists tend to pay attention to core inflation, which ignores food and energy and which better reflects underlying economic conditions. Households pay more attention to the items most frequently bought, in particular gasoline and groceries.
There’s certainly some truth to this, as the gasoline index was responsible for four-fifths of the increase in the December CPI, and food prices are obviously a big concern right now. But as you can also see from the graph above, households simply have been more inflation-hawkish since the crisis began.
To be fair, going back ten years does seem to show a closer relationship between the survey’s expectations and headline CPI:
But there were also periods of divergence, and the core CPI seems to have little relationship to the survey’s expectations.
Meanwhile, here’s a longer-term chart, courtesy of the Atlanta Fed, showing consumer expectations of inflation in the Conference Board’s monthly survey:
The series has averaged more than five per cent for the year through January 2011, and was even higher the prior year. Headline CPI, of course, was 1.5 per cent last year and 2.7 per cent in 2009.
We don’t recommend that news outlets stop reporting the results of these surveys — there’s value in knowing what households are worried about — but surely it isn’t asking too much that stories include a caveat about their recent historical inaccuracy.
Related links: Jeffrey Lacker’s inflation disconnect – FT Alphaville Charting CPI – FT Alphaville
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