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Inflation expectations and the evolution of U. S. inflation

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  • Jeffrey C. Fuhrer

Abstract

Much recent commentary has centered on the importance of well-anchored inflation expectations serving as the foundation of a well-behaved inflation rate. But the difficulty in relying on this principle is that inflation expectations are not directly observable, and thus it is hard to know whether expectations truly play such an anchoring role in the evolution of inflation. In the current circumstances this question is of much more than academic interest, as widely used measures suggest the coincidence of a large unemployment gap and muted production costs with fairly stable long-run inflation expectations. While a high unemployment rate would tend to depress inflation, lower production costs may serve as a counterweight to downward pressure. Which effect will prevail? This brief examines the role of expectations and anchoring by employing expectations proxies derived from surveys of professional forecasters. The brief concludes that there is some evidence that stable long-run expectations have an indirect anchoring effect on inflation, but that to date the effect on resource slack remains considerable.

Suggested Citation

  • Jeffrey C. Fuhrer, 2011. "Inflation expectations and the evolution of U. S. inflation," Public Policy Brief, Federal Reserve Bank of Boston.
  • Handle: RePEc:fip:fedbpb:y:2011:n:11-4
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    References listed on IDEAS

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    1. Jeremy Rudd & Karl Whelan, 2007. "Modeling Inflation Dynamics: A Critical Review of Recent Research," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 39(s1), pages 155-170, February.
    2. Klaus Adam & Mario Padula, 2011. "Inflation Dynamics And Subjective Expectations In The United States," Economic Inquiry, Western Economic Association International, vol. 49(1), pages 13-25, January.
    3. Ricardo Nunes, 2010. "Inflation Dynamics: The Role of Expectations," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 42(6), pages 1161-1172, September.
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    Keywords

    Inflation (Finance);

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