What is the Michigan inflation expectations survey?

The University of Michigan Surveys of Consumers include questions asking respondents what they expect inflation to be over the next 12 months and over the next 5 to 10 years. These measures are among the most closely watched inflation expectations indicators by the Federal Reserve and financial markets.

The survey methodology involves telephone interviews with a nationally representative sample of approximately 500 US households each month. Respondents are asked for their expected rate of change in prices generally, not for specific items. The preliminary results are released around mid-month and the final reading comes at the end of the month, giving markets two data points per release cycle.

The Fed monitors household inflation expectations because expectations can become self-fulfilling. If consumers expect higher inflation, they may demand larger wage increases and accelerate purchases, behaviors that actually generate the inflation they anticipated. This "expectations channel" is a central concern in monetary policy, and keeping long-term inflation expectations anchored near 2% is a core objective of the Fed's framework.

When the 5-year inflation expectations measure rises above its historical range, it generates significant attention from Fed officials. During 2022, the preliminary Michigan 5-year expectation briefly spiked to 3.3%, prompting Fed Chair Powell to explicitly cite it as a reason for the aggressive 75-basis-point rate hike in June 2022. The reading was later revised down, but the episode demonstrated how sensitive the Fed is to movements in this measure.

For market participants, the Michigan survey offers a gauge of inflation psychology that complements market-based measures like breakeven inflation rates. Market breakevens reflect the views of bond traders and institutional investors, while Michigan reflects household sentiment. Divergences between the two can be analytically valuable, indicating whether inflation concern is concentrated in financial markets or has spread to the broader public.