The Curious Case of the Rise in Deflation Expectations

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.