Consumers appear to be correct with the rate of change of their long run inflation expectations. In the latest survey, one year inflation estimates increased 0.1% to 2.8% and 5 year expectations fell 0.2% to 2.3%. As you can see from the chart below, this matches the cycle low for longer run inflation estimates.

Source: Renaissance Macro Research

This could indicate the consumer might be able to withstand price increases since nominal wage growth has been strong. It could also mean the consumer has seen this story (of small bumps of inflation) before and doesn’t believe it will last.

Year over year inflation has increased a few times this expansion but has fallen back down once the comparisons got tougher. Shelter has been the main driver of CPI inflation this cycle as it has been increasing ahead of CPI and is the largest component of the index. Since consumers think housing is unaffordable, price growth could slow. It’s predicted to fall in the ECRI home price index. If this occurs, CPI growth will take a turn lower.

The most interesting facet of this inflation survey is that the Fed is about to hike rates a total of 4 times in 2018 even while consumers have the lowest expectations for inflation in at least 14 years. The only argument in favor of rate hikes is the Fed should have neutral rates if growth is strong. There’s no reason to be contractionary if inflation is modest.

Baby Boomers Retire

Two of the most discussed topics in economics and personal finance are how the labor force participation rate is being suppressed by baby boomers retiring and how many Americans don’t have enough saved for retirement. As an aside, we review the prime age labor force participation rate to get rid of the effect from baby boomers retiring and the effect of young people working less because they are getting educated more than prior generations. The chart below shows both of those highly discussed topics.