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This edition was written by Chesapeake Dowdy, Andrew Rosin, Jack Spira, and David Wessel
Using Survey of Consumer Expectations data from January 2019 to July 2024, New York Federal Reserve Bank President John C. Williams and co-authors examine how households’ inflation expectations evolved during the sharp rise and subsequent decline in inflation following the COVID-19 pandemic. First, they find that inflation expectations over a one-year time horizon increased sharply—by 4.3 percentage points—between January 2020 and June 2022, while medium-term inflation expectations grew at a slower pace and long-term inflation expectations remained relatively stable. Second, even as actual inflation continued to rise, medium-term inflation expectations peaked at 4.2% in September 2021 and declined to 2.8% by August 2022. Meanwhile, short-term inflation expectations remained elevated until October 2024. The authors suggest that medium-term expectations began declining earlier because households viewed pandemic-related disruptions, such as supply-chain problems, worker shortages, and shutdowns, as temporary. Third, medium- and long-term deflation expectations spiked during the inflation surge: the share of respondents expecting deflation three years ahead nearly tripled, from 9.5% in September 2021 to 25.7% in August 2022, while five-year-ahead deflation expectations rose similarly. The authors suggest that this may reflect households’ belief that sharp pandemic-era price increases would reverse. More broadly, they argue that explaining these patterns may require models that incorporate households’ differing views about the nature and persistence of inflation shocks.
Raquel Fernández of NYU and Inés Berniell and Milagros Onofri of the Center for Distributive, Labor and Social Studies use cross-country surveys to examine changing fertility preferences and attitudes toward parenthood. In a survey across 22 high-income countries, the number of children adults considered ideal fell from 2.42 in 2012 to 2.31 in 2022. Both women and men increasingly viewed children as interfering with parents’ freedom, but this shift was especially important for women, accounting for about half of the decline in their ideal number of children. In another survey of five European countries, the share of respondents (women aged 20 to 44 and men aged 20 to 54) intending to have a child within three years fell from 28% to 21% between survey rounds conducted on average in 2007 and 2022. The largest contributor to this decline was the erosion of the belief that people need children to lead a fulfilled life, an attitude that changed more than any other the authors examine. Although housework became more equally shared, a change that might have been expected to make parenthood more attractive to women, the authors find little evidence that the division of household labor itself helps explain falling fertility preferences.
The rapid development of artificial intelligence has renewed interest in how higher productivity could affect inflation. Ludovica Ambrosino of the London Business School and co-authors use a small-open-economy model to compare productivity gains that occur immediately with gains that build gradually to the same permanently higher level. When the level of productivity rises immediately in non-tradable sectors, productive capacity expands faster than demand and inflation falls. But when the gains arrive only gradually, households and firms raise consumption and investment in anticipation of higher future income and returns. Demand can therefore rise before supply does, raising the natural rate of interest and requiring tighter monetary policy to prevent inflation. The results are reversed when productivity rises in the tradable sector. Because domestic tradable prices are largely tied to world prices, an immediate productivity gain raises wages and the relative price of non-tradable goods and services, temporarily boosting inflation as prices adjust. If the gain is instead expected to build gradually, the prospect of higher future productivity causes the currency to appreciate quickly, lowering import and tradable prices before wages and production fully adjust. In the authors’ simulations, that decline outweighs higher non-tradable inflation, so overall inflation falls.
“I’ll start with the obvious: artificial intelligence (AI). The levels of investment are hard to fathom. Earlier this year, nearly $700 billion in expected AI investments were announced in one week. I’ve seen estimates comparing the total spend to the build-out of the railroads in the 1800s. And this investment seems impervious to the level of interest rates, the cost of building, or the amount of uncertainty. The demand appears relentless.
“It’s not only data centers, however. I am starting to hear investment momentum elsewhere, too. Bank pipelines are healthy. Mergers and acquisitions are active. Leases are being signed. Factories are being built. The defense sector is booming. Many business leaders explain they’ve concluded high uncertainty is the new baseline. They can’t afford to wait any longer.
“In part, that’s because strong earnings make these investments defensible and affordable. Second quarter earnings are up over 30 percent. If you include hyperscalers, they are up over 50 percent. Earnings forecasts for the coming quarter keep being revised up. Corporate leverage is down from where it was in 2020.
“Underlying this financial strength has been a strong reported uptick in productivity growth. While the role of AI is much discussed, I actually believe the vast majority of the productivity improvement to date came out of the labor supply squeeze post-pandemic. Having lived through that trauma, businesses invested in automation, new staffing models, and leaner operating practices. They’re benefiting from those changes today.”
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