US Economics Analyst Inflation Expectations After Five Years of High Inflation

Economics Research 24 August 2026 | 5:46PM EDT

Inflation Expectations After Five Years of High Inflation

n Many Fed officials have emphasized over the last several months that inflation Abhay Duggirala | has been above target for over five years. Their concern is that a lengthy period Goldman Sachs & Co. LLC of high inflation could raise inflation expectations if the current episode continues for too much longer. We look back at what the last decade of economic research has taught us about how inflation expectations are formed and apply the lessons to the current episode to assess how concerned we should be. n We draw three lessons from economic research on inflation expectations. First, inflation expectations influence price and wage setting and consumption and investment decisions, so anchoring matters. Second, expectations are primarily driven by the inflation people experience, and earlier life experiences matter too. Third, monetary policy plays a limited role in anchoring expectations because households and firms are inattentive to the Fed except when inflation is very high, suggesting that Fed communication alone is unlikely to anchor their expectations. n In assessing what five years of high inflation have done to expectations, it is important to remember that they followed more than ten years of low inflation. Our composite measures suggest that the net effect has left long-term household expectations back where they were in the mid-2000s before the last two cycles, while short-term business and household expectations have rebounded with the oil shock this year and are somewhat elevated. n But different surveys send different signals. NY Fed data suggest that the recent period of high inflation has aligned the expectations of younger people, whose main experience had been low inflation after the financial crisis, with those of older generations whose life experience of inflation had been more varied. The Michigan measures are more elevated, but they have been prone to more politicized and extreme responses since a recent methodological change. n In light of these concerns about the reliability of survey data, we adapt a model used in academic research to ask how recent realized inflation ought to have affected both the level of inflation expectations and their sensitivity to realized inflation, or how anchored they are. The model implies that the net effect of the last two cycles should have left the level of inflation expectations and their sensitivity only slightly above where they would have been if inflation had been 2% continuously since the financial crisis.

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Goldman Sachs US Economics Analyst

n Other signals about expectations highlighted in economic research are admittedly a bit more concerning. Both the dispersion of expectations and perceived inflation persistence remain high, though surveys disagree on how high and the public’s attentiveness to inflation seems to be falling back toward normal levels. n On net, our findings suggest that inflation expectations are at most modestly elevated and not at immediate risk of unanchoring. Looking ahead, our analysis suggests that, if our forecast for a return to target inflation by the end of 2027 is realized as oil prices stabilize and tariff effects work their way out of the year-on-year calculations, the combination of softer inflation and more distance from the inflation shocks of the past few years should put downward pressure on inflation expectations next year.