What do households (not economists) think inflation will be in three years? I use the deviation of forecast from target as a proxy measure for credibility regarding inflation.<\/p>\n
Figure 1:<\/strong> Median 3 year CPI inflation forecast (black), 25th, 75th percentile (gray), in %. CPI inflation consistent with 2% PCE inflation target (red dashed line). NBER defined peak-to-trough recession dates shaded gray. Source: NY Fed, NBER, and author\u2019s calculations.<\/em><\/p>\n As of February 2024, the inflation rate expected 3 years out is lower than it was in January 2021. While expected CPI inflation has declined, dispersion of forecasts has increased slightly.<\/p>\n Figure 2:<\/strong> Median 3 year CPI inflation forecast deviation from\u00a0 CPI inflation consistent with 2% PCE inflation target (black), interquartile range (sky bule), in %.. NBER defined peak-to-trough recession dates shaded gray. Source: NY Fed, NBER, and author\u2019s calculations.<\/em><\/p>\n Maximal uncertainty, as measured by the interquartile range in 3 year inflation was reached in mid-2022. It\u2019s now dropped to to rates last seen at the exit from the pandemic-induced recession.<\/p>\n Note that some have questioned the use of the earlier framework,\u00a0 pre-New Monetary Strategy laid out in August 2020 (see here for one reader\u2019s critique<\/a>). I\u2019ll note that as far as I can tell, market commentators are still using the target in the old sense of the word (a sense that seems buttressed by Papell and Prodan-Boul\u2019s recent examination of the various vintages of the SEP<\/a>), rather than FAIT with, say, a 3 year window, as that would imply we should be seeing an implied target rate of deflation at about 0.8% per annum.<\/strong><\/a><\/p>\n More about measuring credibility, see e.g. Bordo and Siklos (2017)<\/a>, Bicchal (2022)<\/a>.<\/p>\n<\/p><\/div>\n![\"\"](\"https:\/\/econbrowser.com\/wp-content\/uploads\/2024\/03\/fed_credibility1.png\")
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