This week’s chart is all about expectations. Inflation expectations, to be exact. It’s an important and timely topic because inflation expectations are just as important, if not more important, than actual inflation itself.
That’s because beliefs shape behavior. If people expect higher inflation, they start acting in ways that can make it worse, such as asking for higher wages, raising prices, and even pulling future purchases forward to today.
Now, the Federal Reserve Bank of New York tracks this with a monthly survey. The chart above shows two lines: expectations for inflation over the next year and the next three years. As expected, the one-year number has moved higher recently, which makes sense given the recent surge in gas prices and other everyday costs.
However, the more important piece of the chart is the three-year expectation line, which you can see has held relatively steady at just under 3%. In other words, expectations for inflation remain anchored—and consumers don’t expect this recent bump in inflation to stick around.
That’s good news from the Fed’s perspective. As long as longer-term expectations stay anchored, policymakers have more flexibility in how they approach interest rates—and that’s also good news for financial markets, which also like flexibility.
The bottom line? Short-term inflation is still very much a concern, and the situation can certainly change. But for now, longer-term expectations are still holding steady, and that’s a welcome bright spot in an otherwise challenging environment.
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