The Federal Reserve Risks Setting an Inflation-Expectations Trap

Outside the Federal Reserve building in Washington, D.C. (Larry Downing/Reuters)
So long as the Fed leaves markets guessing, inflation expectations will continue to rise.

NRPLUS MEMBER ARTICLE S eptember marked the fifth consecutive month of inflation at or above 4 percent. The Personal Consumption Expenditures Chain-type Price Index (PCEPI), the Fed’s preferred measure of the price level, grew 4.4 percent from September 2020 to September 2021. PCEPI inflation has averaged 2.98 percent on an annual basis since January 2020, just prior to the pandemic.

Fed officials and many economists have pointed to temporary supply constraints to explain the recent uptick in inflation. The supply constraints are real. And the Fed’s average-inflation targeting framework permits prices to rise above trend during such temporary anomalies.  But that doesn’t mean all is

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William J. Luther is an associate professor of economics at Florida Atlantic University and the director of the Sound Money Project at the American Institute for Economic Research.


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