The Outlook for Inflation and Inflation Expectations

Jeffrey Lacker

Speech from Federal Reserve Bank of Richmond

Abstract: The Federal Open Market Committee (FOMC) closely monitors the public’s expectations about future inflation, because these expectations have a significant effect on the path of inflation. Economists and policymakers have not always recognized the importance of expectations. This was a lesson learned during the “Great Inflation” of the 1960s and 1970s. The Fed has worked hard to maintain the credibility it gained during the chairmanship of Paul Volcker in the early 1980s. This credibility has contributed to stable expectations, which likely helped to prevent a sustained deflation during the recession of 2007-09. One way to measure inflation expectations is via surveys. Another way is to compare the yield on traditional Treasury bonds to the yield on Treasury Inflation-Protected Securities (TIPS) and then extract inflation expectations from inflation compensation. Both measures have pros and cons. Although expectations for inflation over the short term appear to have declined recently, expectations for inflation further ahead are not inconsistent with the Fed’s 2 percent target.

Date: 2016-03-21
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