Charting the Case for Higher Inflation Expectations

Rising headline CPI inflation should support higher U.S. inflation expectations in 2017.

 

The University of Michigan Inflation Expectation survey shows that longer-term U.S. inflation expectations appear sensitive to recent average headline CPI inflation – suggesting that persistently low inflation increases the risk that inflation expectations can become de-anchored to the downside, creating a self-sustaining cycle of declining inflation.

However, recent dollar appreciation and commodity price declines have depressed core and headline inflation and have contributed to the decline in longer-term inflation expectations. As these effects fade, the expected rise in headline CPI inflation from about 1.5% currently to above 2% by the end of 2017 should bring up average inflation and support future inflation expectations, as shown in the chart.

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