Previous article
Goldman Sachs: US inflation expectations remain stable
Economy
Inflation expectations in the US remain anchored despite more than five years of above-target inflation, according to a research note from Goldman Sachs.
The investment bank's analysis suggests that Federal Reserve officials' concerns about a persistent long-term shift in consumer and business inflation expectations may be overblown.
While some central bank officials have expressed concern that a prolonged period of high inflation could destabilize long-term expectations, Goldman Sachs analyst Abhay Duggirala pointed out that the current inflation surge follows more than a decade of inflation below 2%.
This prior period of low price growth has created a structural buffer against a major shift in inflation expectations.
"Overall, our findings suggest that inflation expectations are at best modestly elevated and not in immediate danger of unanchoring," Duggirala wrote.
The report highlights three key lessons based on economic research:
Impact on the Real Economy: Anchoring expectations is critical because short-term inflation expectations directly influence wage demands and price formation, and induce households and firms to reduce consumption and investment when expectations rise.
Experience Matters More Than Politics: Expectations are significantly shaped by personal experience—both recent and accumulated over a lifetime—and not just by central bank communications.
Low Attention to the Fed: During normal periods, public attention to Fed signals remains low, meaning official communications have limited ability to anchor expectations without sustainably reducing actual inflation.
Memory Models
The report points to conflicting signals from major economic surveys. Data from the Federal Reserve Bank of New York suggests that recent inflation has largely converged the inflation expectations of younger cohorts—who previously experienced only low inflation—with those of older generations, whose life experiences have been more diverse.
Meanwhile, the elevated University of Michigan survey figures (where 5-10-year expectations are 3.3%) are partly explained by recent changes in survey methodology and increased political polarization.
To account for potential survey biases, Goldman Sachs adapted an academic memory-based model using historical survey microdata.
The model found that the combination of a decade of low inflation, a recent period of high inflation, and fading memories of the 1970s shocks leaves overall inflation sensitivity only slightly higher than a counterfactual scenario in which inflation had remained at 2% continuously since 2009.
The Path to Normalization
Looking ahead, Goldman Sachs forecasts that US inflation will return to the Federal Reserve's target level by the end of 2027 as oil prices stabilize and the effect of tariffs fades from annual indicators.
The company expects that lower actual inflation and the increased time lag from recent price shocks will exert sustained downward pressure on consumer and business inflation expectations heading into next year.