How high or low are the public’s expectations for future inflation? It depends on how you ask the question, according to New York Fed research.
The closely-watched Michigan Survey of Consumers asks questions about “prices in general” to measure expected and perceived inflation.
But New York Fed researchers found survey questions that use the word ‘prices’ instead of ‘inflation rate’ “may bias expectations upwards.”
Responses to questions about “prices in general,” were significantly higher than responses for “the rate of inflation” when asking for expectations of the next 12 months, they found.
Why? Questions that used the word ‘prices’ “focused respondents relatively more on personal price experiences and elicited expectations that were more strongly correlate to the expected price increases for food and transportation,” the researchers wrote.
The Federal Reserve keeps a close eye on inflation expectations, as they can become a self-fulfilling prophecy.
Read the full report here