Despite the stability of the median 10-year inflation expectations in the Survey of Professional Forecasters (SPF) near 2 percent, we show that not a single SPF respondent’s expectations have been anchored at the target since the Federal Open Market Committee’s (FOMC) enactment of an inflation target in January 2012, or even since 2015. However, we find significant evidence for “delayed anchoring,” or a move toward being anchored, particularly after the federal funds rate lifted off in December 2015.
The Federal Open Market Committee’s inflation target is stated in terms of the personal consumption expenditures price index (PCEPI). The PCEPI, like the consumer price index (CPI), measures inflation in the expenditures of households, but these indexes differ in purpose, scope, and construction. Notably, since the CPI is used as the reference rate for numerous financial contracts, one can derive implied longer-run CPI inflation forecasts from financial contracts. Such forecasts are widely reported. But if policymakers are to use these forecasts to guide their pursuit of the inflation target, they need to translate these CPI inflation forecasts into corresponding implied PCEPI forecasts. Since 1978, CPI inflation has averaged 0.3 percentage points above PCEPI inflation, but this differential has varied significantly over time. In this Commentary, we explain why, investigate a key historical episode, and provide an updated estimate of the likely differential going forward.
Since mid-2014, the long-run inflation expectations of consumers have been declining. We analyze University of Michigan Surveys of Consumers microdata and find that a decline in uncertainty about future inflation is a modest part of the story over this period—but it represents the entire story when considering changes in expectations since 2012.