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The Dynamics of Long-Run Inflation Expectations: A Market-Based Perspective

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  • Anna Cole
  • Julian Kozlowski
  • Joseph Martorana

Abstract

This paper analyzes market-based probability distributions for long-run inflation expectations derived from inflation derivatives. We construct forward-looking distributions for five-year-ahead inflation to assess the likelihood that inflation will fall above, below, or near the Federal Reserve's 2 percent target. By examining the mean, volatility, and skewness of these distributions, we document how expectations have evolved since the onset of the COVID-19 pandemic. To assess the reliability of market-based measures, we compare our results with alternative data sources. We highlight the elevated probability of inflation exceeding the 2 percent target that persisted shortly after the COVID-19 pandemic. The findings underscore the importance of market-based tools in capturing nuanced inflation dynamics and informing policy and financial decisions.

Suggested Citation

  • Anna Cole & Julian Kozlowski & Joseph Martorana, 2025. "The Dynamics of Long-Run Inflation Expectations: A Market-Based Perspective," Working Papers 2025-015, Federal Reserve Bank of St. Louis.
    • Handle: RePEc:fip:fedlwp:101179
    DOI: 10.20955/wp.2025.015
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    References listed on IDEAS

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    More about this item

    Keywords

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    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation

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