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There’s a Big Divergence Developing in Inflation Expectations

Older people who remember bouts of high inflation see much stronger price pressures ahead.

Elderly residents play bingo while presumably discussing lurking price pressures.
Photographer: CHRISTOPHE ARCHAMBAULT/AFP

Inflation is always and everywhere a monetary phenomenon, according to Milton Friedman. It’s also a massively subjective experience.

People might have different impressions of inflation depending on their own personal ‘baskets’ of recurrent items, but they can also have different concerns based on their personal history with price pressures. Those who lived through the 1970s, for instance, might be far more inclined to see Weimar-esque hyperinflation lurking around the corner, while those who’ve never witnessed inflation hit 2% are far more sanguine.

As Ulrike Malmendier and Stefan Nagel put it in their seminal 2016 paper examining how people actually form inflation expectations:

That dynamic is now fully apparent, according to data from the New York Fed, with a schism now developing between younger survey respondents who expect inflation to hit 3.19% in a year, and an older generation who sees it getting close to 5% within the same time period.

So while respondents across the spectrum of ages do see inflation trending higher, the olds expect a much higher rate than the youngs.