Authors: Olivier Armantier, Gizem Kosar, Jason Somerville, Giorgio Topa, Wilbert van der Klaauw, and John C. Williams
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Staff Reports
The Curious Case of the Rise in Deflation Expectations
Number 1037
October 2022 Revised November 2023
October 2022 Revised November 2023
JEL classification: D12, D84, E31, E52
We study the behavior of U.S. consumers’ inflation expectations during the high inflation period of 2021-23 using data from the New York Fed’s Survey of Consumer Expectations. Inflation expectations rose and fell as inflation surged and then moderated, but with notable differences across forecast horizons. Inflation uncertainty and disagreement also rose markedly and then abated. Despite the sharp rise in inflation, we see a sizable increase in the left tail of the distribution of medium- and longer-term expectations and increased expectations of deflation. Using a pair of special surveys, we find that those who expect deflation are more likely to expect price mean reversion and generally expect better, not worse, economic outcomes. We show that although a standard learning model of inflation expectations formation captures some of the movements in inflation expectations and inflation uncertainty over this period, the model is not able to replicate the timing of the rise in medium-term expectations and inflation uncertainty, some aspects of disagreement, or the rise in deflation expectations.
Author Disclosure Statement(s)
Olivier Armantier
I declare that I have no relevant or material financial interests that relate to the research described in my paper entitled “The Curious Case of the Rise in Deflation Expectations," joint with Gizem Kosar, Jason Somerville, Giorgio Topa, Wilbert van der Klaauw, and John Williams. Prior to circulation, this paper was reviewed in accordance with the Federal Reserve Bank of New York review policy, available at https://www.newyorkfed.org/research/staff_reports/index.html.
Gizem Koşar
I declare that I have no relevant or material financial interests that relate to the research described in my paper entitled “The Curious Case of the Rise in Deflation Expectations," joint with Olivier Armantier, Jason Somerville, Giorgio Topa, Wilbert van der Klaauw, and John Williams. Prior to circulation, this paper was reviewed in accordance with the Federal Reserve Bank of New York review policy, available at https://www.newyorkfed.org/research/staff_reports/index.html.
Jason Somerville
I declare that I have no relevant or material financial interests that relate to the research described in my paper entitled “The Curious Case of the Rise in Deflation Expectations,” joint with Olivier Armantier, Gizem Kosar, Giorgio Topa, Wilbert van der Klaauw, and John Williams. Prior to circulation, this paper was reviewed in accordance with the Federal Reserve Bank of New York review policy, available at https://www.newyorkfed.org/research/staff_reports/index.html.
Giorgio Topa
I declare that I have no relevant or material financial interests that relate to the research described in my paper entitled “The Curious Case of the Rise in Deflation Expectations," joint with Olivier Armantier, Gizem Kosar, Jason Somerville, Wilbert van der Klaauw, and John Williams. Prior to circulation, this paper was reviewed in accordance with the Federal Reserve Bank of New York review policy, available at https://www.newyorkfed.org/research/staff_reports/index.html.
Wilbert van der Klaauw
I declare that I have no relevant or material financial interests that relate to the research described in my paper entitled “The Curious Case of the Rise in Deflation Expectations," joint with Olivier Armantier, Gizem Kosar, Jason Somerville, Giorgio Topa and John Williams. Prior to circulation, this paper was reviewed in accordance with the Federal Reserve Bank of New York review policy, available at https://www.newyorkfed.org/research/staff_reports/index.html.
John C. Williams
I declare that I have no relevant or material financial interests that relate to the research described in my paper entitled “The Curious Case of the Rise in Deflation Expectations," joint with Olivier Armantier, Gizem Kosar, Jason Somerville, Giorgio Topa and Wilbert van der Klaauw. Prior to circulation, this paper was reviewed in accordance with the Federal Reserve Bank of New York review policy, available at https://www.newyorkfed.org/research/staff_reports/index.html.
I declare that I have no relevant or material financial interests that relate to the research described in my paper entitled “The Curious Case of the Rise in Deflation Expectations," joint with Gizem Kosar, Jason Somerville, Giorgio Topa, Wilbert van der Klaauw, and John Williams. Prior to circulation, this paper was reviewed in accordance with the Federal Reserve Bank of New York review policy, available at https://www.newyorkfed.org/research/staff_reports/index.html.
Gizem Koşar
I declare that I have no relevant or material financial interests that relate to the research described in my paper entitled “The Curious Case of the Rise in Deflation Expectations," joint with Olivier Armantier, Jason Somerville, Giorgio Topa, Wilbert van der Klaauw, and John Williams. Prior to circulation, this paper was reviewed in accordance with the Federal Reserve Bank of New York review policy, available at https://www.newyorkfed.org/research/staff_reports/index.html.
Jason Somerville
I declare that I have no relevant or material financial interests that relate to the research described in my paper entitled “The Curious Case of the Rise in Deflation Expectations,” joint with Olivier Armantier, Gizem Kosar, Giorgio Topa, Wilbert van der Klaauw, and John Williams. Prior to circulation, this paper was reviewed in accordance with the Federal Reserve Bank of New York review policy, available at https://www.newyorkfed.org/research/staff_reports/index.html.
Giorgio Topa
I declare that I have no relevant or material financial interests that relate to the research described in my paper entitled “The Curious Case of the Rise in Deflation Expectations," joint with Olivier Armantier, Gizem Kosar, Jason Somerville, Wilbert van der Klaauw, and John Williams. Prior to circulation, this paper was reviewed in accordance with the Federal Reserve Bank of New York review policy, available at https://www.newyorkfed.org/research/staff_reports/index.html.
Wilbert van der Klaauw
I declare that I have no relevant or material financial interests that relate to the research described in my paper entitled “The Curious Case of the Rise in Deflation Expectations," joint with Olivier Armantier, Gizem Kosar, Jason Somerville, Giorgio Topa and John Williams. Prior to circulation, this paper was reviewed in accordance with the Federal Reserve Bank of New York review policy, available at https://www.newyorkfed.org/research/staff_reports/index.html.
John C. Williams
I declare that I have no relevant or material financial interests that relate to the research described in my paper entitled “The Curious Case of the Rise in Deflation Expectations," joint with Olivier Armantier, Gizem Kosar, Jason Somerville, Giorgio Topa and Wilbert van der Klaauw. Prior to circulation, this paper was reviewed in accordance with the Federal Reserve Bank of New York review policy, available at https://www.newyorkfed.org/research/staff_reports/index.html.
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