Fragile anchors: why inflation expectations may be less stable than we think
Is the apparent anchoring of long-run inflation expectations since the 1980s genuinely the result of Federal Reserve credibility and inflation targeting?
This is the question Stefan Nagel and Ulrike Malmendier attempt to answer in this paper. They adapt the Malmendier-Nagel (2016) experience-based learning model, in which individuals form inflation beliefs by recursively estimating an AR(1) process using only the inflation realizations observed during their own lifetimes. Agents place higher weight on more recent experiences, with the learning gain decreasing with age.
The authors test this framework against three standard empirical anchoring benchmarks :
- The declining news-sensitivity of long-run expectations to inflation surprises since the 1980s
- The further decline in sensitivity after the Fed’s 2012 explicit inflation target adoption
- The stability of long-run expectations during the post-COVID surge
They use data from the Michigan Survey of Consumers (UMICH) for one-year and 5-to-10-year inflation expectations, extending Malmendier-Nagel’s original 1953–2009 sample through 2024 . They also run counterfactual simulations projecting expectations forward under 1970s-style inflation scenarios.
Findings
- Observational equivalence: All three anchoring patterns that economists attribute to Fed credibility are equally consistent with a model where individuals ignore central bank targets entirely and learn only from personal inflation history. Central bank credibility is not necessary to explain the data.
- The mechanism: The apparent stability of long-run expectations during the Great Moderation reflected low perceived short-run inflation persistence and not trust in the Fed’s target . When perceived persistence is low, long-run expectations mechanically respond less to any new inflation surprise.
- Age heterogeneity: The model successfully explains cohort-level differences. In the early 1990s, younger individuals had higher long-run inflation expectations than older ones — consistent with younger cohorts being shaped by 1970s high-persistence inflation. By the 2010s, the pattern reversed, with older cohorts holding higher expectations due to lingering 1970s memory .
- The fragility warning: If individuals were to experience a second and third wave of persistent inflation mirroring the 1973–76 and 1978–81 episodes, 10-year experience-based expectations would rise to over 6% annually. A linear extrapolation using the pre-pandemic sensitivity coefficients would yield a far more moderate 4% rise, demonstrating how conventional models systematically underestimate the unanchoring risk.
Seemingly Anchored Inflation Expectations
Authors: Stefan Nagel, Ulrike Malmendier
From: University of Chicago, UC Berkeley
The anchor breaks: real-time evidence on the fragility of inflation expectations
While Nagel & Malmendier above ask “Was the anchor ever real?,” Alexander Cline and Robert W. Rich ask “Is the anchor still holding in the US?”
The authors apply a formal anchoring measure to three major U.S. surveys of inflation expectations: the University of Michigan Survey of Consumers (UMICH), the Livingston Survey of professional economists, and the US Survey of Professional Forecasters (SPF) . The anchoring measure combines two distinct signals:
- The first is misalignment i.e. how far the average forecast across respondents sits from the Fed’s 2% inflation target.
- The second is disagreement — how widely individual forecasts are scattered around that average .
A critical insight of the paper is that looking at the average alone is not enough: expectations can appear well-anchored on average while hiding significant fragility in the distribution of individual beliefs. Both components need to deteriorate before an episode qualifies as a genuine unanchoring. Data run from the 1960s to early 2026, allowing comparisons to the late 1970s, the standard historical benchmark for unanchored expectations .
Findings
- Professional forecasters have stayed well-anchored. Both the Livingston Survey and the SPF showed some loosening during the pandemic years, but it was mild compared to the 1970s, and expectations have since returned close to the 2% target .
- Consumer expectations tell a sharply different story. The UMICH measure has gone through two deteriorations comparable to or worse than the late-1970s unanchoring: once during the pandemic era (2020–23), and again starting in 2025. It’s worth noting that the 2025 episode already exceeded the late-1970s benchmark in severity by early 2026 .
- The recent deterioration is driven by the average shifting away from target, not just by greater disagreement. In calmer periods, movements in the anchoring measure tend to reflect wider dispersion of individual forecasts. But in acute episodes such as the 1970s, the pandemic, and 2025, it is the average consumer forecast itself that moves well above 2%, making misalignment the dominant force .
- Partisan polarization is the key driver in 2025. From early 2025 onward, respondents identifying as Democrat or Independent sharply raised their inflation expectations, while Republican respondents’ expectations actually declined. The dramatic deterioration in the overall UMICH anchoring measure is almost entirely a story of Democrat and Independent respondents’ average forecasts moving far above the Fed’s target and not a broad-based rise in uncertainty across all groups .
How Anchored Are Short-Run Inflation Expectations Today? A Look at What Consumers and Forecasters Are Telling Us
Authors: Alexander Cline, Robert W. Rich
From: Federal Reserve Bank of Cleveland
