Deflating Inflation Expectations: The Implications of Inflation's Simple Dynamics

56 Pages Posted: 27 Mar 2017

See all articles by Stephen G. Cecchetti

Stephen G. Cecchetti

Brandeis International Business School; National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR)

Michael Feroli

J.P. Morgan Chase & Co.

Peter Hooper

Deutsche Bank Securities, Inc. - Global Markets Research, Economy

Anil K. Kashyap

University of Chicago, Booth School of Business; National Bureau of Economic Research (NBER); Federal Reserve Bank of Chicago

Kermit Schoenholtz

New York University (NYU) - Leonard N. Stern School of Business

Date Written: March 2017

Abstract

This report examines the behavior of inflation in the United States since 1984 (updating Cecchetti et al. (2007)). Over this period, the change in inflation is negatively serially correlated, and the change in inflation is best predicted by a statistical model that includes only information from the two most recent quarters. We find that the level of inflation fluctuates around a slowly changing trend that we call the local mean of inflation. Few variables add extra explanatory power for inflation once the local mean is taken into account. This local mean is itself well characterized by a random walk. Labor market slack has a statistically significant, but quantitatively small, effect on the local mean and inflation expectations have no effect. Some financial conditions that are influenced by monetary policy have larger effects on the local mean. Concretely, this means that one-off moves in labor market slack or inflation expectations that are not mirrored in broader indicators of inflation pressures are unlikely to be predictive of changes in trend inflation.

Keywords: Federal Open Market Committee, FOMC, inflation dynamics, Inflation expectations, inflation target, inflation trend, monetary policy, Philip Curve, price stability, US Monetary Policy Forum

JEL Classification: E31, E52

Suggested Citation

Cecchetti, Stephen G. and Feroli, Michael and Hooper, Peter and Kashyap, Anil K. and Schoenholtz, Kermit, Deflating Inflation Expectations: The Implications of Inflation's Simple Dynamics (March 2017). CEPR Discussion Paper No. DP11925. Available at SSRN: https://ssrn.com/abstract=2941510

Stephen G. Cecchetti (Contact Author)

Brandeis International Business School ( email )

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Waltham, MA 02453
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National Bureau of Economic Research (NBER) ( email )

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Centre for Economic Policy Research (CEPR) ( email )

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Michael Feroli

J.P. Morgan Chase & Co. ( email )

60 Wall St.
New York, NY 10260
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Peter Hooper

Deutsche Bank Securities, Inc. - Global Markets Research, Economy ( email )

60 Wall Street
Mail Stop: NYC60-1815
New York, NY 10005
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Anil K. Kashyap

University of Chicago, Booth School of Business ( email )

5807 S. Woodlawn Avenue
Chicago, IL 60637
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773-702-7260 (Phone)
773 702-0458 (Fax)

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States
773-702-7260 (Phone)
773-702-0458 (Fax)

Federal Reserve Bank of Chicago ( email )

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Chicago, IL 60604
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Kermit Schoenholtz

New York University (NYU) - Leonard N. Stern School of Business ( email )

Suite 9-160
New York, NY
United States

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