- FOMC Actions and Recent Movements in Five-Year Inflation Expectations
FRB of St. Louis
During the 20 years before the start of the COVID-19 pandemic, the inflation rate―measured by the rate of change of the consumer price index (CPI) price level―averaged 2.2%. Over the past year (from May 2020 to May 2021), the same measure of inflation averaged 6.7%. Earlier this year, the Federal Reserve began raising interest rates to curb inflation.
Some have argued that the modern Fed is better equipped to fight inflation than the 1970s and 1980s Fed because it has established credibility over the past few decades.1 Central bank credibility affects the behavior of long-run inflation rates through expectations. The Fed has a longer-run inflation target of 2%.2 If people believe the Fed‘s inflation objective is credible, long-run inflation expectations should not deviate much or for very long from the inflation target. Economists call this anchored expectations.