Have long-term inflation expectations declined in US?

Nice paper by Fernanda Nechio of FRBSF.

The reading on inflation may have declined, but inflation exp remain anchored at 2%:

Inflation has fallen very low recently to well below the 2% objective set by the Federal Open Market Committee (FOMC). Accompanying this decline in actual inflation, forecasts of long-term inflation have also fallen. This coincidence has raised concerns that low current inflation may be pulling down forecasters’ views of distant inflation, which could suggest that long-term U.S. inflation expectations are no longer well anchored.

In this Economic Letter, I use survey-based inflation forecasts to evaluate the extent to which inflation expectations have been affected by the recent low levels of current inflation. I show that the latest long-term inflation forecasts in the Survey of Professional Forecasters (SPF) have decreased somewhat relative to their peak levels after the financial crisis and have essentially returned to their 2007 levels, near the FOMC’s 2% objective.

Moreover, the range of estimates among professional forecasters, which also jumped after the crisis, has declined considerably. This is primarily because those forecasters who had predicted the highest future inflation have lowered their long-term projections.

Examining the forecast variation across the respondents of the SPF sample can shed some light on these changes. In particular, some forecasters increased their estimates after the crisis because of concerns that inflation would rise as a result of the Federal Reserve’s large-scale asset purchases. Many of these forecasters appear to have reversed this assessment and returned their forecasts to pre-crisis levels. Accordingly, the distribution of forecasts has also narrowed.

The calls of inflation will be high after QEs has clearly not folded so far. For all you know deflation threats continue. And within all this, inflation exp remain anchored. I mean what does one make of all this mumbo jumbo?


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