Are Inflation Expectations Unanchored?

Unanchored inflation expectations in the U.S.

This paper by Olivier Coibion and Yuriy Gorodnichenko reviews research and experiences linking inflation and expectations since 2020. The authors analyze data from multiple survey sources including the Michigan Survey of Consumers, Survey of Firms’ Inflation Expectations, Survey of Professional Forecasters, and financial market expectations. They estimate expectations-augmented Phillips curves, conduct cross-country comparisons, and implement a new April 2025 survey of 2,500 U.S. households to assess understanding of monetary policy frameworks.

Findings

• Unanchored expectations: Inflation expectations of most economic agents (households and firms) remain unanchored, both before and during the inflation surge.
• Expectations and inflation dynamics: The inflation surge and subsequent disinflation can be explained largely through shifting inflation expectations and supply shocks, with limited contribution from monetary or fiscal policies.
• Phillips curve analysis: When properly accounting for households’ inflation expectations, the Phillips curve remains stable, and short-run expectations of households/firms matter more than long-run expectations of professional forecasters.
• Policy implications: The authors argue that the main challenge is breaking what they call the “cycle of selective inattention” – when inflation is low, people ignore it; when inflation surges, they learn about monetary policy precisely when it appears to be failing.
• Future outlook: With inflation expectations remaining elevated and new import price shocks occurring, the authors warn we may be entering the early stages of a second inflation surge similar to the 1970s experience.

The authors conclude that policymakers consistently focus on the wrong measures of inflation expectations and that communication strategies need to reach people when inflation is low, not just during inflation surges.

Inflation, Expectations and Monetary Policy: What Have We Learned and to What End?
Authors: Olivier Coibion, Yuriy Gorodnichenko
From: UT Austin, UC Berkeley

Are inflation expectations unanchored in Canada as well?

This Bank of Canada working paper by Olena Kostyshyna, Isabelle Salle, and Hung Truong examines the state-dependent risk of inflation expectations becoming unanchored during different economic periods, with particular focus on the post-pandemic inflation surge in Canada. The researchers employed a heterogeneous-expectations model that distinguishes between two types of forecasters: mean-reverting forecasters who expect inflation to return to the central bank’s target, and trend-chasing forecasters who extrapolate current inflation trends into the future. The study analyzed both aggregate Canadian inflation data and micro-level data from the Canadian Survey of Consumer Expectations (CSCE) covering the period 2014Q4-2024Q2. Individual survey respondents were classified into forecasting types based on their inflation expectation formation patterns, allowing the researchers to track the evolving composition of expectation types over time.

Findings

• Anchoring during different economic periods: During the period of low and stable inflation preceding the recent surge (roughly 2014-2020), aggregate inflation expectations were predominantly mean-reverting, indicating well-anchored expectations. However, during the post-pandemic inflation spike, the share of trend-chasing forecasters increased dramatically from about 50% to approximately 70%.
• Demographic heterogeneity: The analysis revealed significant differences in forecasting behavior across demographic groups. Respondents with lower levels of education and income, females, younger individuals, and renters were more likely to adopt trend-chasing behaviors compared to other groups. These differences became particularly pronounced during the high-inflation period.
• Asymmetric risk: The research identified an important asymmetry in unanchoring risk – the risk appears more severe when inflation peaks above target than when it falls below target. This suggests that upward inflation shocks pose greater challenges for expectation anchoring than downward deviations.
• Spillover to other economic variables: During the high-inflation environment, trend-chasing inflation expectations were strongly associated with higher expectations for other key economic variables, including interest rates, wages, household spending, and house prices at all forecast horizons. Most concerning from a policy perspective was the strengthened pass-through from short-term to long-term inflation expectations among trend-chasers.
• Consumer spending behavior: Contrary to standard economic theory predictions, the study found that trend-chasing consumers were more likely to restrain their spending and increase saving during the inflation surge, rather than bringing forward purchases.

Anchored Inflation Expectations: What Recent Data Reveal
Authors: Olena Kostyshyna, Isabelle Salle, Hung Truong
From: Bank of Canada

Conclusion

Both studies attribute the 2021–2023 inflation surge partly to unanchored expectations interacting with supply shocks. The Bank of Canada identifies a rise in trend-chasing behavior during this period, while Coibion and Gorodnichenko emphasize supply shocks (e.g., energy prices, supply chains) amplified by expectation-driven price-setting. In addition, both working papers document a weak pass-through from inflation expectations to wage growth. But there are interesting differences:

• Key drivers of inflation dynamics
  – The Bank of Canada emphasizes demographic heterogeneity, showing that younger, less-educated, and lower-income households are more prone to trend-chasing behaviors.
  – Coibion and Gorodnichenko prioritize political polarization and “attention regimes,” noting that partisan divides in expectations widened significantly during the surge.
• Policy recommendations
  – The Bank of Canada advocates for sustained monetary tightening to counteract trend-chasing expectations, particularly in high-inflation environments.
  – Coibion and Gorodnichenko criticize conventional inflation-targeting frameworks and suggest price-level targeting or revised communication strategies to mitigate selective inattention.