Inflation Is a Young Person’s Game
Differing Expectations Have Implications for Pricing
By Justin Lahart
Feb. 9, 2015 2:22 p.m. ET
The Federal Reserve has come to view inflation expectations as playing an important role in what happens to prices. Maybe who is doing the expecting matters as well.
One reason the Fed hasn’t seemed particularly alarmed by the cooling in inflation that lower gasoline prices and the higher dollar have brought on is that inflation expectations haven’t moved. Indeed, the Federal Reserve Bank of New York on Monday said that its January survey of consumers showed that people expect inflation of about 3% over the next three years. That is just a fraction less than the 3.05% they expected a year ago. (People consistently guess high on where inflation seems to be heading.)
The Fed survey also shows how much age matters for inflation expectations. People over 60 expect inflation to come in at 3.4%, while people under 40 expect it to be 2.8%. This represents a shift from the 1970s and 1980s when University of Michigan data show it was the older cohort who expected less inflation.
Expectations are supposed to work their way into actual inflation in part because they affect the prices people are willing to pay. But the differing age-based expectations show why that might not always be so. Older Americans’ view tends to be colored by living through inflationary times. And, because they often live on fixed incomes, such people are sensitive to the prospect of inflation eroding their purchasing power.
The result, though, is that older Americans who expect higher inflation may be inclined to make fewer purchases. That would be because they feel they need to conserve capital.
Given this would have a deflationary effect, the Fed might want to pay more attention to what is, or isn’t, worrying the younger set.
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