Inflation Expectations Matter a Lot. But Why

Inflation Expectations Matter a Lot. But Why?

June 25, 2026

• Article
• Inflation

For years, the Federal Reserve Bank of Atlanta headquarters tour featured a film describing monetary policymaking as part art and part science. Few concepts embody that art-science blend better than policymakers' reliance on inflation expectations as a guide to actual inflation.

There's science: economists gather and analyze mountains of data to measure where consumers, businesspeople, financial markets, and economic forecasters expect inflation to head. The art is in interpreting those findings-determining whose expectations matter most and over what time frames, how and when to ask people what they expect, how those expectations truly affect spending and investing, and other vagaries.

What is clear is that inflation expectations matter to monetary policymakers. You have to go back 17 years, to August 2009, to find a Federal Open Market Committee (FOMC) postmeeting statement that did not mention inflation expectations. That's 133 regularly scheduled meetings ago.

Individual policymakers also often cite inflation expectations. In a May speech signaling a change in his view on the risks to monetary policy, Fed governor Christopher Waller mentioned inflation expectations 19 times. In a July 2025 speech, former Atlanta Fed president Raphael Bostic explained why the FOMC's then-forthcoming policy framework should place greater emphasis on inflation expectations.

In fact, the FOMC's 2026 longer-run policy strategy states that long-term inflation expectations fixed near 2 percent "foster price stability and moderate long-term interest rates and enhance the Committee's ability to promote maximum employment in the face of significant economic disturbances." That covers both of the Fed's mandates of price stability and maximum employment. As a result, the strategy document continues, the FOMC "is prepared to act forcefully" to keep expectations "anchored."

The central role that inflation expectations play in monetary policymaking is why the Atlanta Fed in 2011 introduced a survey to measure the expectations of businesses, the Business Inflation Expectations (BIE) survey. It's why other Reserve Banks devised related tools, including well-known expectations measures from the Cleveland and New York reserve banks.

Importance of expectations grounded in research

Why does the Fed pay so much attention to what people think inflation is going to do?

The answer is grounded in a deep body of research. A 2025 paper by Michael Kiley of the Fed Board of Governors details the benefits of expectations that stick around 2 percent, come what may economically. Economists like Kiley and Brent Meyer of the Atlanta Fed credit stable inflation expectations as an important factor, though not the sole factor, in helping the FOMC lower inflation substantially without unduly damaging the labor market after the postpandemic inflation surge, a rare feat in economic history. As measured by the Personal Consumption Expenditures (PCE) price index, the Fed's preferred gauge, year-over-year inflation slid from over 7 percent in mid-2022 to 2.3 percent in September 2024.

Another paper by four Board of Governors economists reinforces the notion that expectations translate to reality. The authors note that when American consumers expected the inflation rate to keep rising during the postpandemic episode, they were more likely to search for a higher-paying job. That means the boost in short-term household inflation expectations could have fueled higher wage growth as more workers tried to find more lucrative work or used that threat to bargain for a raise.

In response to faster wage and nonlabor cost growth, firms tend to raise prices. Meyer and coauthor Xuguang Simon Sheng wrote in a recent paper that when companies expect their costs to rise, they also expect to raise prices to cover the additional expenses. Meyer and Sheng found that partly because of that dynamic, what BIE survey respondents say about their costs closely tracks actual US inflation statistics-another finding that suggests expectations influence economic behavior.

Although the recent inflationary episode and subsequent decline in inflation illustrate the value of anchored inflation expectations, it's also instructive to turn to an earlier period when expectations fluctuated wildly: the "Great Inflation" of the 1970s and early '80s.

In those years, high inflation led people to expect continued high inflation. Consequently, workers demanded pay raises to compensate for the recent and expected future erosion of purchasing power. To fund the wage increases, businesses raised prices, fueling further inflation and fostering a "wage-price spiral." During the same period, the Fed was to become widely faulted, including by Fed economists in subsequent years, for not resolutely sticking with tighter monetary policy that could have better capped inflation expectations and actual inflation.

Patrick Higgins, an Atlanta Fed policy adviser and economist, noted that during the 1970s and '80s, expectations and realized inflation swung quickly. In the first six months of 1973, for example, PCE inflation leaped from 3.3 percent to 5.3 percent. It peaked at nearly 12 percent in 1974, then plunged to around 5 percent less than two years later, only to return to 11-plus percent in early 1980. Inflation expectations were similarly erratic but sometimes rose only after actual inflation rose.

Thus, Higgins said, it is not entirely clear that high inflation expectations in those days directly led to high inflation, or vice versa. "It's hard to say what the causal mechanism was," he said.

It often is. Like many things in economics, fully understanding inflation expectations and their implications is a work in progress, and the measurement and interpretation of expectations are far from perfect.

Meyer points to a couple of fundamental questions. One, how do monetary policymakers ensure that they're measuring expectations that truly influence the decisions of households and firms? And two, if researchers are measuring the right things, are they measuring them at the right frequency? This gets to the difference between long-term-five or 10 years ahead-and short-term-one year ahead-expectations.

Bostic asked a salient question in his 2025 speech: by concentrating on anchoring long-term expectations, as the FOMC does, might policymakers risk dismissing shorter-run dynamics in the economy that ultimately work against price stability goals? For example, a series of discrete, short-run economic shocks-pandemic-induced supply chain snarls, an inflation outbreak, the Ukraine war, tariffs, or the Iran war and subsequent energy price spikes-might not each alone affect long-run inflation expectations. But a cascading series of events like these can coalesce to boost expectations and actual inflation for a relatively long time. Indeed, PCE inflation has exceeded the Fed's 2 percent annual target for more than five years and counting.

Another issue in measuring inflation is timing when to ask people what they think, Meyer pointed out. When inflation is low, most people don't think about it, nor about what it might be a year or five years down the road. These considerations complicate the seemingly simple act of acquiring useful information about where consumers or price setters think inflation is headed.

The study of expectations is evolving but not new

Economists gather information on inflation expectations in a couple of main ways: through surveys and by tracking certain financial market transactions that are shaped by investors' projections of future inflation.

Researchers have been at this for a while. In some form, the study of what people and markets-which reflect the aggregate actions of people-expect from economic variables dates to the 1930s. But researchers began systematically measuring inflation expectations in earnest in the 1970s and '80s. Higgins noted that researchers generally, and unsurprisingly, find newer measures more refined and useful than their precursors.

Still, new or old, the various measurements come with inherent strengths and weaknesses, Higgins said. For instance, one of the best-known surveys of consumer attitudes, conducted by the University of Michigan, asks about inflation expectations. But after being done by phone for decades, the survey shifted online a couple of years ago. It turns out, Higgins said, that people online apparently are more likely to offer a higher number for future inflation than they would say to another person on the phone. So, there are issues in trying to detect patterns by comparing data from one period to another.

And some highly regarded metrics, such as the Atlanta Fed's BIE survey, and the surveys from the New York and Cleveland feds, started only in the 2010s, so they lack the long history of data necessary to establish conclusions about what caused what during the Great Inflation, Higgins explained.

The upshot is that the study of inflation expectations is still maturing.

The Livingston Survey, now managed by the Federal Reserve Bank of Philadelphia, dates to the 1940s, placing it among the graybeards of economic surveys. They survey measures the expectations of professional economic forecasters, and though it is widely perceived as sound, Higgins noted that economists' inflation expectations probably have little bearing on whether most people decide to buy a car or a refrigerator or request a raise tomorrow or next month or at all.

To be sure, inflation expectations are just one data set among the array of indicators Fed researchers track as they seek to understand inflation. Why do economists at the Atlanta Fed devote such scrutiny to inflation and its effects? Because price stability is half of the dual mandate the Congress assigned the Fed, alongside maximum employment.

The relationship between what consumers and price setters think inflation will do and what it actually does is the subject of ongoing research-not only at the Atlanta Fed, but across the Fed System-that seeks to address many remaining puzzles. At the same time, it's reasonably clear that if consumers and price setters lose faith in the central bank's ability to wrestle inflation back to the 2 percent objective, then almost by definition their inflation expectations rise. If that happens, achieving price stability only becomes more difficult.