Inflation expectations remain near the Fed’s target
See where inflation expectations are trending and how this connects with short-term interest rates in the foreseeable future.
February 15, 2019 | 1 minute read
Data released this week shows that inflation pressures have yet to gain significant traction, despite the U.S. unemployment rate remaining close to its 50-year low.1 The consumer price index (CPI) rose 1.6% in January 2019 compared to one year earlier.2
Thanks in large part to lower energy prices, it has been on a gradual downtrend since it peaked at 2.9% in June 2018.2 The less volatile core CPI has held steady at 2.2% for the past three months.2
Within this environment, inflation expectations have receded in recent months from their levels of last year. As the chart shows, expectations for inflation have been hovering at, or just below, the Fed’s 2% target.3
This is important because, according to a recent Economic Letter published by the Federal Reserve Bank of San Francisco, expectations have become “the dominant factor explaining inflation dynamics.”4 The Fed economists note that “evidence suggests that inflation expectations are well anchored.”4
The Fed’s relatively dovish turn over the past six weeks, coupled with recent inflation readings that strengthen the case for its current pause, suggests that short-term interest rates could remain within today’s relatively low range for the foreseeable future.