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Press Release

Decline in uncertainty explains decline in consumer inflation expectations: Cleveland Fed study

The drop in the longer-run inflation expectations of consumers since 2012 derives entirely from a decline in their uncertainty about future inflation, according to Randal Verbrugge, a senior research economist at the Federal Reserve Bank of Cleveland, and Carola Conces Binder, an assistant professor of economics at Haverford College.

Using microdata from the University of Michigan Surveys of Consumers, Verbrugge and Binder study the inflation forecasts given by respondents each month. Noting that the respondents have a tendency to report “round number” responses when they are very uncertain, the researchers use the responses to construct an uncertainty index.

“We find evidence of a significant drop in inflation uncertainty since 2012,” say the researchers. But because the level of inflation uncertainty has not declined very much since mid-2014, the researchers say the change in uncertainty cannot explain much of the decline in inflation expectations since that time.

The researchers then split the respondents into two groups—highly uncertain consumers and less uncertain consumers—and compare the actual average inflation expectations of each group. “We observe that the inflation expectations of both types of consumer have declined, but the expectations of both types are back to where they were in early 2012,” say Verbrugge and Binder. “From this fact, we are able to conclude that the 0.34 percentage point drop in average consumer long-run inflation expectations since 2012 derives entirely from a decline in the proportion of highly uncertain consumers.”

While many commentators have attributed the decline in long-run inflation expectations to falling gasoline prices, Verbrugge and Binder say that explanation falls short. “First, the strength of the correlation between gasoline prices and long-run inflation expectations has historically been low,” say the researchers. “Second, while gasoline prices fell a lot over this period, they also exhibited two upward surges, and neither appeared to boost inflation expectations.”

Read Digging into the Downward Trend in Consumer Inflation Expectations

And for all things inflation, visit Inflation Central.

Federal Reserve Bank of Cleveland

The Federal Reserve Bank of Cleveland is one of 12 regional Reserve Banks that along with the Board of Governors in Washington DC comprise the Federal Reserve System. Part of the US central bank, the Cleveland Fed participates in the formulation of our nation’s monetary policy, supervises banking organizations, provides payment and other services to financial institutions and to the US Treasury, and performs many activities that support Federal Reserve operations System-wide. In addition, the Bank supports the well-being of communities across the Fourth Federal Reserve District through a wide array of research, outreach, and educational activities.

The Cleveland Fed, with branches in Cincinnati and Pittsburgh, serves an area that comprises Ohio, western Pennsylvania, eastern Kentucky, and the northern panhandle of West Virginia.

Media contact

Doug Campbell,, 513.455.4479