Support Powell? Goldman Sachs explains in detail: Why the University of Michigan's inflation expectations are "unreliable"

In recent weeks, the "soft data" on inflation in the United States (indicators of inflation expectations based on surveys and markets) has deteriorated sharply. The overnight short-term inflation expectations from the University of Michigan for March soared to 4.9%, while long-term inflation expectations also reached their highest level since 1993, raising market concerns about inflation. U.S. stocks faced a "Black Friday", with the Nasdaq falling nearly 3%.

However, Goldman Sachs recently stated that "the University of Michigan data is unreliable," explicitly pointing out that investors can ignore the inflation expectation data from the University of Michigan. Compared to other surveys, the University of Michigan's survey has many limitations in its design.

First, the survey has "hard flaws"—design defects. Compared to the surveys conducted by the New York Federal Reserve and the Conference Board, the sample size of the University of Michigan's survey is relatively small, and there are fewer repeat respondents. Moreover, the way the survey questions are framed asks respondents about the expected price changes rather than directly inquiring about the inflation rate, allowing respondents to provide answers within a broader range.

Additionally, political bias and changes in survey methods exacerbate the deviation in inflation expectations. The University of Michigan's survey is particularly susceptible to the influence of tariff news. These factors may lead to data distortion, affecting the accuracy of inflation expectations.

Therefore, Goldman Sachs concludes that the inflation expectation data from the University of Michigan should be viewed with caution. Even though the data from the University of Michigan has provided traditional media with "ammunition" to attack Trump's policies and raised the threshold for the Federal Reserve to cut interest rates soon, Federal Reserve officials will not be intimidated by claims of "tariffs causing runaway inflation." Market inflation compensation indicates that this year's inflation rise is unlikely to persist beyond 2025, and if the economy weakens, inflation may even decline slightly in the coming years.

Three Major Inaccurate Factors: Partisan Strife, Party Composition, and Survey Methodology

In addition to these limitations, Goldman Sachs also found that the University of Michigan's survey is particularly susceptible to recent tariff news due to the following three reasons:

• Increased Partisan Bias: The inflation expectations in the survey have become highly partisan. Generally, when control of the government shifts to a party they oppose, supporters of that party tend to raise their inflation expectations, while when control shifts to a party they support, inflation expectations tend to decrease. This change is particularly pronounced. Since the 2024 election, Democrats in the University of Michigan survey have raised their short-term inflation expectations by 4.4 percentage points and their long-term inflation expectations by 1.8 percentage points, while Republicans have lowered their short-term and long-term expectations by about 1.6 percentage points each. The gap in inflation expectations between Democrats and Republicans is now the largest since the survey began consistently recording respondents' party affiliation in 2018.
• Overrepresentation of Democrats: The proportion of Democrats in the University of Michigan survey has consistently been higher than that of Republicans, and since the survey fully transitioned to online response collection in July 2024, the proportion of Democrats in the survey has even further increased. This change in party composition may further amplify the impact of partisan bias on the median inflation expectations
• Change in Survey Methodology: The shift from telephone surveys to online surveys has led to more extreme answers regarding inflation expectations. Goldman Sachs estimates that online respondents are 3% more likely to report a one-year high inflation expectation compared to telephone respondents. Their expectations are also more susceptible to recent increases in local inflation.

Goldman Sachs believes that the three issues mentioned above collectively raised the University of Michigan's short-term inflation expectations by about 1.3 percentage points and long-term inflation expectations by about 0.5 percentage points. In particular, changes in party composition and intensified partisan positions led to a significant increase of 1 percentage point in one-year inflation expectations in February