Expectations help shape inflation reality, as well as tone of news coverage on the topic

There are the numbers. Then there are the expectations for the numbers. The difference between the two is where investors dare tread and where the Federal Reserve hopes to flex its muscle.

High inflation has squeezed consumers and companies for 18 months. And while it has backed off its summertime peak, prices continue increasing at an annual rate not experienced in more than a generation. Still, Americans are hopeful prices will continue to cool over the next year. Yet, households think inflation will be much stronger than the economic professionals at the Federal Reserve foresee.

This could be described as the expectations gap. That gap is important because it can shape spending habits, which play a large role in whether the American economy experiences a recession, and if so, how bad it could be.

Here are the numbers: The Fed’s favored inflation gauge, personal consumption expenditures, rose 6% in October. The central bankers expect inflation to be almost cut in half to around 3.3% next fall. Consumers, though, expect inflation to be 5% a year from now, according to the University of Michigan survey of consumers.

So, shoppers think they will be paying much higher prices for stuff and services next year than does the Federal Reserve. Thinking prices will be higher can make prices higher.

“Elevated inflation expectations can push up actual inflation, setting off an inflationary spiral,” Federal Reserve Bank of San Francisco economists wrote recently.

It leaves the Fed fighting the real inflation consumers and businesses are experiencing right now, and trying to convince Americans that price hikes will slow considerably more than they anticipate.

And a key element in shaping inflation expectations is a column like this. How the news characterizes inflation helps shape consumer inflation expectations, according to research from the San Francisco Fed. It found “that continued extensive and negative news coverage of inflation could pose a risk for household inflation expectations becoming entrenched and contributing to higher inflation itself.”

Yes, inflation data has been slowing (positive news coverage), yet inflation remains historically high (negative news coverage). Ah, the old saw of a two-handed economist, or economy columnist, in this case, rings true!

Investors would be wise to keep this in mind this week when the November personal consumption expenditures number will be released on Friday.