Today-and-Trust Inflation Expectations Model
Estimate inflation behavior from current prices and trust in the long-run anchor
- Difficulty
- Advanced
- Time to result
- ~months to results
- Steps
- 5
- Confidence
- 94%
The Today-and-Trust model treats expected inflation as a tension between two forces. The first is today's observed inflation, which strongly influences what businesses and consumers anticipate in the near term. The second is trust that the central bank will eventually restore its stated long-run target. Pricing and wage decisions reflect a changing blend of these forces: recent inflation gives firms greater permission to raise prices, while a credible anchor limits how permanent those increases become. Because surveys and market prices contain wording, liquidity, and risk-premium distortions, the model emphasizes observed behavior alongside multiple imperfect measures. Convergence is gradual rather than instantaneous, so inflation can remain elevated after its original supply and demand shocks have faded.
Origin
Tom Barkin presented this as his practical shorthand for interpreting inflation expectations during his Masters in Business interview.
Core principles
- 01Current inflation shapes near-term expectations
- 02Institutional credibility anchors long-term expectations
- 03Businesses price relative to the inflation environment
- 04Measured expectations are imperfect proxies
- 05Expect convergence toward the anchor to occur gradually
How to run it
- 1
Establish today's inflation signal
Assess current inflation and the recent direction of change. Treat present conditions as the strongest immediate reference point for expectations.
Pro tip Examine both aggregate inflation and the prices most visible to households and businesses.
Watch out A single monthly reading may be volatile.
- 2
Assess trust in the anchor
Determine whether businesses, consumers, and markets believe the central bank will restore its long-run target. Look for evidence in behavior as well as stated opinions.
Pro tip Long-term market measures can be useful proxies for institutional trust.
Watch out Market measures also contain liquidity and risk-premium effects.
- 3
Observe pricing and wage behavior
Ask whether firms believe customers will accept increases and whether workers and employers are setting wages around recent inflation. Compare behavior across sectors.
Pro tip Retailer resistance to supplier increases can reveal whether the anchor is regaining influence.
Watch out Stated expectations may differ from actual commercial decisions.
- 4
Triangulate imperfect measures
Compare surveys, market-based measures, current inflation, and direct business evidence. Diagnose the biases in each source rather than selecting one preferred metric.
Pro tip Track disagreement between measures as information about uncertainty.
Watch out Survey wording can materially change reported expectations.
- 5
Model gradual convergence
Estimate how expectations could move from today's inflation toward the trusted long-run target over time. Allow price-setting habits and delayed contract resets to slow the process.
Pro tip Use a range of convergence paths instead of a single precise forecast.
Watch out Do not assume expectations snap immediately back to target.
In the wild
When normal inflation is near two percent, a retailer can reject an eight percent supplier increase unless it has an exceptional justification. During a broad inflation episode, the same supplier may attempt the increase because competitors and customers have become accustomed to rising prices. As current inflation falls and confidence in the long-run anchor persists, retailer resistance should strengthen again.
→ Pricing behavior gradually shifts from today's elevated inflation toward the trusted long-run norm.
A lawn-service operator may have no major cost increase but notice that competitors have raised prices. The recent inflation environment supplies the confidence to test a higher price. Customer resistance and continued trust in lower future inflation eventually constrain the increase.
→ The example explains why inflation can persist after its original shock begins fading.
Common mistakes
Treating one metric as ground truth
Survey and market measures each contain biases. Use them as partial evidence rather than exact readings of an invisible expectation.
Assuming instant re-anchoring
Price and wage behavior adjusts through contracts, competitive reactions, and repeated decisions, so convergence can take years.
Ignoring institutional credibility
Current inflation alone cannot explain long-term behavior when people believe policy will eventually restore price stability.
Is it for you?
Best for
It is best for policymakers and business leaders evaluating pricing, wages, and the likely persistence of an inflation episode.
Not ideal for
It is not ideal as a precise numerical forecasting model or when a structural shock has destroyed confidence in the long-run anchor.
From the transcript
“there are two competing things in every business's mind, in every consumer's mind about inflation. One is what is it today? Because the best indicator…”
“I think it really matters. But I don't think our metrics are very good.”
“I think you get there over time. You don't get there quite as quickly as sort of a purest model would suggest.”
From the episode
Richmond Federal Reserve President and CEO Tom Barkin
Tom Barkin