Inflation and Inflation Expectations

Monthly Labor Review, April 2008 | Go to article overview

Inflation and Inflation Expectations


In the late 1970s, prices for consumer goods excluding food and energy--often called "core inflation"--increased substantially, while prices for crude oil increased more than 300 percent. During the same period, long-term inflation expectations rose sharply as well. But since 2001, even as crude oil prices have increased some 400 percent, core inflation and inflation expectations have been relatively stable. This change has led some researchers to investigate the relationship between long-term expectations about inflation and the actual behavior of inflation. In a recent issue of the Federal Reserve Bank of Kansas City's Economic Review (first quarter, 2008), economists Todd E. Clark and Taisuke Nakata examine the issue using a number of statistical models.

In particular, the authors analyze the influence of long-term inflation expectations on inflation, as well as the anchoring of inflation and expectations. If influence has risen over the last several decades, there should be a correlation between expectations and the actual behavior of inflation during that period. If inflation and expectations have become more anchored over time, they will be less sensitive to news about the economy--for example, the public expects the Federal Reserve to act to control inflation in the face of indications that it is rising. …

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