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

Anna Cole, Julian Kozlowski and Joseph Martorana

No 2025-015, Working Papers from Federal Reserve Bank of St. Louis

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.

Keywords: inflation; Inflation expectations; market-based probabilities (search for similar items in EconPapers)
JEL-codes: E31 (search for similar items in EconPapers)
Pages: 14 pages
Date: 2025-06-30
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Persistent link: https://EconPapers.repec.org/RePEc:fip:fedlwp:101179

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DOI: 10.20955/wp.2025.015

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