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While the stronger than expected headline reading from today's Consumer Confidence report got most of the attention, inflation expectations also showed a notable uptick. Believe it or not, even though the headline CPI shows that 'official' inflation is rising by a rate of under 2%, consumers expect to see prices rise by 5.6% over the next year.
So are expectations for 5.6% inflation over the next 12 months high or low by historical standards? The answer depends on your time frame. Today's reading of 5.6% was the highest since June 2009, but when viewed in the context of the last six years, it is still low.
Taking a longer term view of inflation expectations shows a much less benign picture. The chart below shows the level of inflation expectations going back to 1990. As shown, expectations have not only gotten more volatile in the last ten years, but they have also been gradually trending higher with higher highs in each spike and higher lows in each pullback. After bottoming out under 4% in the late 1990s, expectations have been creeping higher to today's level of 5.6%.
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