The Horizon
Two versions of 2046, the same man, the same $500,000 you set aside this week.
In the first it buys roughly $315,000 of what that money buys today. In the second it buys roughly $256,000, and the man did nothing differently in either.
Nothing separates the two except which long-run inflation rate turns out to be right. American households and the bond market gave their answers within four days of each other, and the answers are more than a percentage point apart.
Neither version is a poor one. One of them simply carries about $59,000 more purchasing power on every half million, and that is the whole of the difference.
The Event
The University of Michigan published its final September Surveys of Consumers on Friday, September 25. The Index of Consumer Sentiment came in at 48.1, revised up from a preliminary 47.8.
That is 7.0% below August's 51.7 and 12.7% below the 55.1 recorded a year earlier. It is the lowest reading in four months and roughly 15% below where the index stood in January.
The components moved unevenly. Current Economic Conditions slipped 1.9% to 50.9, while the Index of Consumer Expectations fell 10.1% to 46.3.
Year-ahead inflation expectations rose to 4.6% from 4.0% in August, against 3.4% before the Iran conflict. Long-run expectations, which cover five to ten years, ticked up to 3.4% after three months at 3.3%.
Director Joanne Hsu wrote that views of current and year-ahead personal finances "both weakened about 10% this month, with concerns over high prices continuing to climb."
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The Path
The two inflation lines in that release did not move together. The year-ahead figure jumped six tenths of a point while the five-to-ten-year figure moved one tenth.
That difference is the finding rather than the headline. Households are reporting a price shock, not a revised view of the decade, and the two call for different responses.
The short number describes a year a builder will spend his way through. The long number is the one that prices the capital he is not spending, and only that one belongs in a twenty-year calculation.
The bond market answers the same question every business day. The Fed's H.15 release for September 25 put the ten-year Treasury at 5.18% and the ten-year inflation-indexed yield at 2.85%.
Subtracting one from the other leaves 2.33%, the inflation rate investors are being paid to accept across the next decade, and the five-year pair in the same release produces an identical figure. Households surveyed in the same week said 3.4%.
That is a gap of more than a full point on one question. One side committed money to its answer and the other answered a telephone survey.
Compounded over twenty years the gap stops being abstract. Half a million dollars retains roughly $315,000 of current purchasing power at 2.33% and roughly $256,000 at 3.4%, a difference of about $59,000.
The expectations index reaches outside the brokerage account faster than either inflation line does. At 46.3 it dropped 10.1% in a single month, and what it measures is how households see their own finances a year out.
That is the forward revenue line for a builder who owns a business or rents out property. Expectations move before spending does, and spending is what the customer and the tenant do next.
Current Conditions fell 1.9% while Expectations fell 10.1%, more than a fivefold difference in a single month. Households are not reporting that today got worse, they are reporting that next year looks worse.
The Watch
August personal income and outlays land on Wednesday, September 30, at 8:30 a.m. Eastern. The PCE price index inside that release is the measured version of what this survey asked about.
The preliminary October Surveys of Consumers arrive on October 9, two weeks after this one. The line to read is the five-to-ten-year figure, because a second consecutive move off 3.3% would be a trend rather than a tick.
Both legs of the breakeven calculation are published every business day in H.15. The market drifting up toward 3.4%, or households settling back toward 2.33%, resolves the disagreement above without anyone announcing it.
Two long-run inflation answers now sit more than a point apart, and every dollar held in a nominal asset is positioned on one of them.