Consumer Expectations of Inflation Have Jumped. How Accurately Have They Forecast Past Inflation?

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Since 1946, the Institute for Social Research (ISR) at the University of Michigan has conducted surveys of consumers. Each month, the ISR interviews a nationwide sample of 900 to 1,000 consumers, asking a variety of questions, including some on inflation.

The results of the University of Michigan surveys are widely reported in the business press. In the latest ISR survey it’s striking how much consumers expect inflation to increase.  The median response by those surveyed to the question “By about what percent do you expect prices to go up/down on the average, during the next 12 months?” was 7.3 percent. If this expectation were to prove to be correct, inflation, as measured by the percentage change in the consumer price index (CPI), will have to more than double from its April value of 2.3 percent. 

How accurately have consumers surveyed by the ISR predicted future inflation? The question is difficult to answer definitively because the survey question refers only to “prices” rather than to a measure of the price level, such as the consumer price index (CPI). Some people may have the CPI in mind when answering the question, but others may think of the prices of goods they buy regularly, such as groceries or gasoline. Nevertheless, it can be interesting to see how well the responses to the ISR survey match changes in the CPI, which we do in the following figure for the period from January 1978—when the survey began—to April 2024—the last month for which we have CPI data from the month one year in the future.

The blue line shows consumers’ expectations of what the inflation rate will be over the following year. The red line shows the inflation rate in a particular month calculated as the percentage change in the CPI from the same month in the previous year. So, for instance, in February 2023, consumers expected the inflation rate over the next 12 months to be 4.2 percent. The actual inflation, measured as the percentage change in the CPI between February 2023 and February 2024 was 3.2 percent.

The figure shows that consumers forecast inflation reasonably well. As a simple summary, the average inflation rate consumers expected over this whole period was 3.6 percent, while the actual inflation rate was 3.5 percent. So, for the period as a whole, the inflation rate that consumers expected was about the same as the actual inflation rate. The most persistent errors occurred during the recovery from the Great Recession of 2007–2008, particularly the five years from 2011 to 2016. During those five years, consumers expected inflation to be 2.5 percent or more, whereas actual inflation was typically below 2 percent.

Consumers also missed the magnitude of dramatic changes in the inflation rate. For instance, consumers did not predict how much the inflation would increase during the 1978 to 1980 period or during 2021 and early 2022. Similarly, consumers did not expect the decline in the price level from March to October 2009.

The two most recent expected inflation readings are 6.5 percent in April and, as noted earlier, 7.3 percent in May. In other words, the consumers surveyed are expecting inflation in April and May 2026 to be much higher than the 2 percent to 3 percent inflation rate most economists and Fed policymakers expect. For example, in March, the median forecast of inflation at the end of 2026 by the members of the Fed’s policymaking Federal Open Market Committee (FOMC) was only 2.2 percent. (Note, though, that FOMC members are projecting the percentage change in the personal consumption expenditures (PCE) price index rather than the percentage change in the CPI. CPI inflation has typically been higher than PCE inflation. For instance, in the period since January 1978, average CPI inflation was 3.6 percent, while average PCE inflation was 3.1 percent).

If economists and policymakers are accurately projecting inflation in 2026, it would be an unusual case of consumers in the ISR survey substantially overpredicting the rate of inflation. One possibility is that news reports of the effect of the Trump Administration’s tariff policies on the inflation rate may have caused consumers to sharply increase the inflation rate they expect next year. If, as seems likely, the tariff increases end up being much smaller than those announced on April 2, the inflation rate in 2026 may be lower than the consumers surveyed expect.