Opinion
Jonathan Levin: Trump fanned the inflation fears that haunt his presidency now
Summary
- In America’s hyper-partisan atmosphere, rhetoric on the cost of living has skewed inflation expectations, a variable that policymakers track. The US Fed has an unenviable job.
Inflation concerns may well have given Donald Trump the US presidency. His campaign harped on the elevated cost of eggs and bacon and argued that his predecessor Joe Biden, along with Fed chair Jerome Powell, had enabled an “inflation nightmare." Now, he faces public inflation expectations that are utterly divorced from reality and could well stand in the way of his success as president.
The University of Michigan’s latest survey shows that consumers expect costs to rise 4.3% over the next year, the worst inflation expectations since 2023. They expect prices to rise 3.3% annually over the next five to 10 years, the highest level for the longer-term gauge since 2008. Mainstream economists are far more optimistic, but the perception of an ongoing inflation crisis could well be self-fulfilling.
There’s broad agreement among economists that inflation expectations are an important determinant of realized inflation. The anticipation of higher costs can influence business’s pricing decisions, induce consumers to buy now to front-run future price hikes and prompt workers to demand wage increases.
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Expectations feature in inflation forecast models and are consulted by monetary policy practitioners at central banks. In mid-2022, Powell even cited rising consumer inflation expectations as justification for delivering the biggest single policy-rate increase since 1994.
But, as much as economists agree on the importance of expectations, they disagree on the best way to measure them. Survey micro-data reveals massive gaps in the public’s understanding of what inflation even is. Evidence also suggests that Americans’ answers to inflation-expectation surveys tend to overweight variables such as fuel and food prices, in part because they buy them frequently enough to notice the difference.
Though important, central banks often downplay food and energy in their views of future inflation since they’re inherently volatile. A hyper-partisan political environment, coupled with the post-truth world of social media, makes inflation expectations even trickier to interpret.
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One Federal Reserve Bank of Cleveland working paper, authored with Morning Consult economist John Leer and outside academics, overlaid Facebook data and inflation expectations and found that social networks now play a prominent role in shaping expectations. In contrast to the traditional media of old, narratives can now move at lightning speed and the particulars of the story can vary widely across social media silos.
Indeed, the latest Michigan survey showed that it’s Democrats that are now driving the inflation expectations indices higher—a sharp break from the past several years. Next year, Democrats expect prices to rise around 5.1%, presumably because of concerns about the effect of Trump’s proposed tariffs.
Republicans’ expectations have collapsed to the point where they now imply zero inflation. Even accounting for Trump’s policy priorities, no mainstream economist surveyed by Bloomberg thinks that real inflation in 2025 will be anywhere near as high as Democrats fear or as low as Republicans anticipate. It’s hard to justify the disparity, since most inflation indices paint a consistent picture of inflation that is just slightly above normal.
Trump and his fellow Republicans bear responsibility for the manner in which inflation was politicized. They discounted the global nature of the post-pandemic price surge that reflected, at least in part, supply-chain disruptions. Trump even took pot-shots at America’s central bank. Today, it looks as though unanchored inflation expectations have become a bipartisan problem that could have serious consequences.
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One caveat to all of this: The University of Michigan survey provides just one imperfect reading of consumer inflation expectations. Another index created by Morning Consult and the Cleveland Fed attempts to find a way around widespread concerns about such surveys including the gaps in Americans’ understanding about what inflation is and how it’s measured.
As an alternative, the Morning Consult-Cleveland Fed measure asks respondents how their incomes would have to change to make them “equally well-off," given expectations about prices in the next 12 months. That index suggests that expectations have largely been moving sideways. It also finds that the gap between Republicans and Democrats has been closing.
Still, politicians and monetary policymakers need to be careful with inflation psychology. For Trump, that’s another reason to shelve his tariff war and save his exaggerated language for other topics. His critics should also choose their words carefully. Finally, for the Fed, it’s probably one more reason to keep policy rates where they are for the time being. ©Bloomberg
