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

Anna Cole, Julian Kozlowski and Joseph Martorana

Review, 2025, vol. 107, issue 13, 14 pages

Abstract: This article 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; inflation derivatives (search for similar items in EconPapers)
JEL-codes: E31 (search for similar items in EconPapers)
Date: 2025
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Working Paper: The Dynamics of Long-Run Inflation Expectations: A Market-Based Perspective (2025)
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Persistent link: https://EconPapers.repec.org/RePEc:fip:fedlrv:101761

DOI: 10.20955/r.2025.13

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