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Has the behavior of inflation and long-term inflation expectations changed?

  • Todd E. Clark
  • Taisuke Nakata

From 1975 to 1980, inflation in core (nonfood and nonenergy) consumer prices rose sharply as crude oil prices more than tripled. Yet, as crude oil prices quadrupled from late 2001 to 2007, core consumer price inflation remained essentially flat. Some observers have attributed the stability of consumer price inflation in the more recent episode to the influence of long-term inflation expectations. While inflation expectations rose significantly in the second half of the 1970s, they remained largely unchanged from 2001 through 2007. The increased stability of inflation and long-term expectations raises the possibility that the behavior of both variables has fundamentally changed. ; Recent discussion has focused on two possible forms of change: the influence of long-run expectations on inflation and the anchoring of inflation and expectations. A third possible source of change is smaller shocks to inflation, expectations, and other macroeconomic variables. Any of these changes in the behavior of inflation and long-term inflation expectations could have important implications for monetary policy. ; Clark and Nakata find some evidence that the dynamics of inflation and long-term inflation expectations have changed modestly. In particular, compared to 20 or more years ago, inflation and expectations appear to be slightly better anchored: Unexpected increases in inflation die out slightly faster and produce less of an increase in long-term expectations. However, the reduced volatility of inflation and expectations is largely due to smaller shocks.

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Article provided by Federal Reserve Bank of Kansas City in its journal Economic Review.

Volume (Year): (2008)
Issue (Month): Q I ()
Pages: 17-50

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Handle: RePEc:fip:fedker:y:2008:i:qi:p:17-50:n:v.93no.1
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