Why Higher Inflation Expectations Don’t Mean Higher Inflation

One correction hallmark is the fear morph—when the big story accompanying the market downturn evolves into new, tangentially related worries. Inflation fears now are a case in point, erupting from tariffs and featuring heavily in consumer confidence surveys. As we will show, though, this seems like a false fear. Tariffs or no, the measures that actually drive inflation look tame. On this front, the likely future reality remains better than widely perceived, making this another opportunity for positive bullish surprise.

As Exhibit 1 illustrates, the University of Michigan’s long-running survey of expected price changes over the next year found respondents said they anticipate prices rising at their fastest pace in 44 years in April. Yes, that is an even higher share than in summer 2022, when supply-chain chaos raged and actual inflation rates were far higher ... and peaking. This huge, unprecedented (by this measure) divergence between attitudes toward inflation and where it currently stands is striking. But how realistic is this assessment of future prices?

Exhibit 1: Tariffs Fears Have Driven an Outsized Spike in Inflation Expectations

Source: FactSet, as of 4/22/2025. University of Michigan Survey of Consumers, Expected Change in Prices Over the Next Year, Median, January 1978 – April 2025, and CPI, January 1978 – March 2025.

Not very, based on Nobel laureate economist Milton Friedman’s maxim that inflation is always and everywhere a monetary phenomenon caused by too much money chasing too few goods and services. There is plenty of historical evidence to back Friedman up. As Exhibit 2 shows, broad money supply (M4) growth leads CPI by around 18 months.

Exhibit 2: Slow Money Supply Growth Implies Tame Inflation

Source: Center for Financial Stability and Federal Reserve Bank of St. Louis, as of 4/22/2025. Divisia M4 (including US Treasurys), January 1968 – February 2025, and CPI, January 1968 – March 2025.

Through February, M4 was crawling at a 3.5% y/y pace, below average historically and unlikely to reignite price pressures. In June 2020, by contrast, M4 spiked over 30% y/y. Two years later, CPI hit 9.1% y/y. Massive amounts of money sloshing around the system, paired with supply-chain bottlenecks and staffing shortages, caused prices to spike economywide. These are far larger disruptions than anything tariffs are likely to drive.

Why? First, despite palpable concern, global supply chains aren’t presently under pressure. Exhibit 3 shows the New York Fed’s Global Supply Chain Pressure Index (GSCPI) at just under zero in March, meaning logistics stress is about as normal as it gets.

Exhibit 3: Global Supply Chain Pressure Nowhere Near 2021 Levels

Source: Federal Reserve Banks of New York and St. Louis, as of 4/22/2022. Global Supply Chain Pressure Index and CPI, January 1998 – March 2025.

Granted, that is merely the baseline entering this potentially higher-tariff era. Tariffs—those imposed or threatened—could cause havoc if goods become scarce as higher barriers discourage trade. After all, the more government taxes something, the less you get of it. But their implementation isn’t a given. Consider: The Trump administration is now negotiating how to lower trade barriers with dozens of countries, not to mention carveouts granted in the meantime. Meanwhile, several lawsuits are challenging the legal basis for blanket tariffs, with a high likelihood they don’t pass muster.^[i] Also, there are workarounds. Goods from (or passing through) Canada and Mexico, for example, remain largely exempt, either officially or in practice. US Customs lacks the manpower and infrastructure to conduct “country of origin” checks—enforcement likely stays shoddy for the foreseeable future.

Second, let us suppose, for argument’s sake, tariffs stand. We still don’t think that is likely to spike inflation. Conventional wisdom says businesses will have to embed higher tariffs in prices. But businesses have more options than that. Although it isn’t a walk in the park, managers are no stranger to supplier negotiations and input substitution to defray costs—or taking profit margin hits if necessary to live another day. Companies know their customers, and we have seen many in price-sensitive industries say they will eat tariffs to preserve market share.

This doesn’t surprise us when we consider it in the context of slow-growing money supply. Without a surge in currency circulation, businesses’ ability to pass on price increases is limited. Absent fast-flowing money, demand is constrained—the buck stops—preventing people from “chasing” ever higher-cost goods.

Third, the idea tariffs can drive economywide price hikes is misperceived. Goods aren’t everything people buy and imported goods even less. During the first Trump administration’s tariffs, goods import prices rose at quite benign rates in 2018 and fell in 2019. CPI’s core goods component, which excludes food and energy, fell in 2018 and barely rose in 2019. Granted, tariffs were much milder then, but it disproves the notion of an automatic tariff flow-through. Meanwhile, tariffs are far less relevant to services production—82% of private sector output.^[ii] While service-sector firms are seeing somewhat elevated price pressures, as Exhibit 4 shows, they are nothing like lockdown-driven supply interruptions from a few years ago.

Exhibit 4: Services Firms Aren’t Seeing Price Pressures Anything Like 2022’s

Source: FactSet, as of 4/22/2025. ISM services purchasing managers’ index (PMI) prices paid subindex and CPI, January 1998 – March 2025.

Moreover, while consumer inflation expectations are elevated, Exhibit 5 shows bond market-based indicators aren’t. In our view, this is more telling than the surveys because it reflects what people are actually doing, the decisions they are making based on all available information—not their feelings in one moment. (And feelings that are heavily influenced by recent news and data that may not predict where prices go—as 2022’s coincident inflation rate and inflation expectations peaks show.)

Exhibit 5: The Bond Market Isn’t Expecting High Inflation

Source: Federal Reserve Bank of St. Louis, as of 4/22/2023. 5-Year Breakeven Inflation Rate, 1/2/2003 – 4/21/2025.

To us, it looks like people are fighting the last war on inflation—projecting 2022’s troubles to today. But we think this is fear of a false factor. While it is apparently swinging sentiment, underlying inflation fundamentals seem far less likely to wreak havoc than popularly imagined.