What do households (not economists) think inflation will be in three years? I use forecast deviations from target as a proxy measure of inflation confidence.
figure 1: Median 3-year CPI inflation forecast (black), 25th and 75th percentiles (gray), in %. CPI inflation is consistent with the 2% PCE inflation target (red dashed line). NBER-defined recession peak-to-trough dates appear gray. Source: Federal Reserve Bank of New York, National Bureau of Economic Research, and author's calculations.
As of February 2024, inflation is expected to be lower than in January 2021 in three years. Although CPI inflation is expected to decline, the dispersion of forecasts has increased slightly.
figure 2: Deviation of the median 3-year CPI inflation forecast from CPI inflation consistent with the 2% PCE inflation target (black), interquartile range (sky blue), in %. NBER-defined recession peak-to-trough dates are shaded gray. Source: Federal Reserve Bank of New York, National Bureau of Economic Research, and author's calculations.
Maximum uncertainty, measured by the 3-year inflation interquartile range, is reached in mid-2022. Rates are now down to levels last seen at the end of the pandemic-induced recession.
Note that some have questioned the use of the earlier framework before the new currency strategy was developed in August 2020 (see here for one reader’s perspective) criticism).I would point out that, as far as I know, market commentators are still targeting the old meaning of the word (a meaning that seems to have been influenced by Papell and Prodan-Boul’s recent examination of SEP vintages), rather than FAIT, for example a 3 year window, since that means we should see Implied target rate Deflation is about 0.8% per year.
For more information on measuring credibility, see e.g. Bordo and Siclos (2017), Bihar(2022).
