University of Michigan Research Warns Long-Term Inflation Expectations Could Become Entrenched

University of Michigan research released Friday warned that repeated inflation shocks have raised the risk that elevated long-term inflation expectations could become entrenched, a dynamic that could make future disinflation harder even if actual price pressures moderate.

The warning came in a special report published alongside the university’s final October consumer-sentiment data. The research did not say long-run expectations are already entrenched. Instead, it argued that recent readings, viewed in historical context, show conditions under which inflationary psychology can take hold if consumers keep absorbing fresh shocks and begin to treat higher inflation as the norm.

In its research note on long-run inflation expectations, the Surveys of Consumers said five years of above-target inflation and a renewed pickup in expectations in recent months have exposed risks that elevated expectations could become embedded more deeply in household thinking.

Research note says risks are rising, not that entrenchment is complete

The central point of the report is one of risk and trajectory. Joanne Hsu, director of the University of Michigan’s Surveys of Consumers, wrote that post-pandemic inflation expectations now resemble the early stages of the inflationary episodes of the 1960s and 1970s more than a one-off price surge that quickly fades. In the report’s telling, the danger is not simply that people expect somewhat higher inflation next year. The larger concern is that households may start adjusting their behavior in ways that reinforce inflation itself.

The report describes that process as the spread of inflationary psychology. If consumers come to expect broad price increases to persist, they may pull purchases forward to avoid paying more later. That kind of precautionary spending can support demand in the present and create additional upward pressure on prices, making inflation tougher to bring down. The report says interviews with consumers and the historical record both suggest that those risks are present today, while also making clear that entrenchment is not inevitable.

To make its case, the Michigan team compared recent long-run expectations with readings from 2019 and 2024 using a methodologically consistent web-based data series. The report says expectations were relatively stable before the pandemic, worsened around the 2022 inflation peak, softened through October 2024, and then moved higher again after successive shocks in 2025 and 2026. It highlighted the 2025 escalation in tariff policy and the 2026 Iran conflict, which the report says kept energy prices elevated, as important developments shaping consumer inflation views.

According to the report, the recent softening in inflation expectations never returned them to their pre-pandemic range. More importantly for the current debate, the latest readings stand above the ranges seen in both 2024 and 2019. The report says that renewed firming in September and October suggests consumers do not expect meaningful disinflation in the foreseeable future.

October survey showed year-ahead and long-run expectations edging higher

The research note arrived the same day the university published its final October survey results. Those figures showed year-ahead inflation expectations rising to 4.7% in October from 4.6% in September. Long-run inflation expectations, which the survey defines over the next five to ten years, increased to 3.5% from 3.4%.

The university said both measures rose for the second straight month and reached their highest levels since May. It also noted that the 3.5% long-run reading sits above the 2024 range of 2.8% to 3.2%. That matters because long-run measures are usually watched for signs that households still believe inflation will eventually settle down after temporary shocks pass.

The broader sentiment report painted a picture of consumers who still feel squeezed by prices and financing costs. The headline index of consumer sentiment was 48.0 in October, essentially unchanged from September’s 48.1. The current conditions gauge fell to 46.7 from 50.9, while the expectations index rose to 48.8 from 46.3. Hsu said the drop in current conditions was driven entirely by buying conditions for durables, which plunged 18% as higher interest rates and affordability concerns weighed on households.

That combination helps explain why the inflation-expectations story matters beyond a narrow survey statistic. Consumers can feel bad about present conditions while still expecting prices to keep rising. If that belief becomes more deeply rooted, policymakers could face a more stubborn inflation environment even when growth looks soft and sentiment remains weak.

Historical comparisons show why the findings carry policy weight

A large part of the report’s significance lies in how it frames today’s readings against earlier inflation cycles. For long-run expectations, the university used web-interview data going back to 2017 to create a consistent comparison across recent years. For a longer historical perspective, it turned to year-ahead inflation expectations and compared them with annual CPI inflation back to the 1960s.

The report argues that the historical analogue most relevant to the current period is not the end of the Great Inflation era, when inflation expectations were already badly damaged, but the earlier stages when repeated shocks pushed each subsequent trough in expectations higher than the one before it. In other words, expectations did not fully reset after each episode. They ratcheted upward over time. The university said that pattern likely helped set the stage for the broader entrenchment of elevated expectations that later defined the era.

The current environment is obviously different in many respects, and the report does not claim the United States is replaying the 1970s. Still, it says today’s setting shares one important feature with those earlier years: multiple shocks that consumers broadly perceive as inflationary. The note says many consumers do not see tariffs or oil-price shocks as one-time level changes. Instead, many appear to interpret them as signs that inflation itself will continue running high.

The report also pointed to other metrics that remain elevated. It said mean long-run expectations, the 75th percentile of inflation expectations, the share of consumers with very high expectations, and the interquartile range as a measure of uncertainty all remain above 2024 and 2019 readings. That suggests the story is not limited to a small pocket of respondents, and it underscores the role uncertainty may be playing in consumer thinking.

Another reason for caution, the note said, is that consumer spending has stayed relatively resilient despite negative views of the economy. If some of that spending reflects efforts to buy before expected price increases, disinflation could prove harder to achieve than standard sentiment readings alone might imply. The university’s next preliminary consumer-sentiment release is scheduled for Nov. 6.