Consumer Inflation Expectations Predictive?

A subscriber noted and asked: “Michigan (at one point) claimed that the inflation expectations part of their survey of consumers was predictive. That was from a paper long ago. I wonder if it is still true.” To investigate, we relate “Expected Changes in Prices During the Next Year” (expected annual inflation) from the monthly final University of Michigan Survey of Consumers and actual U.S. inflation data based on the monthly non-seasonally adjusted consumer price index (U.S. city average, All items). The University of Michigan releases final survey data near the end of the measured month. We consider two relationships:

• Expected annual inflation versus one-year hence actual annual inflation.
• Monthly change in expected annual inflation versus monthly change in actual annual inflation.

As a separate (investor-oriented) test, we relate monthly change in expected annual inflation to next-month total returns for SPDR S&P 500 (SPY) and iShares Barclays 20+ Year Treasury Bond (TLT). Using monthly survey/inflation data since January 1978 (limited by survey data) and monthly SPY and TLT total returns since July 2002 (limited by TLT), all through October 2021, we find that: (more…)