A new research paper by the Federal Reserve Bank of Cleveland finds that high short-term inflation expectations will make it difficult to bring down inflation.
According to a press release from the Federal Reserve Bank of Cleveland, a decrease in inflation usually accompanies a downturn in the economy, but a recent paper from the Cleveland Fed’s Center for Inflation Research finds that although long-term inflation expectations are still anchored around the 2%, elevated short-term inflation expectations lingering from the COVID-19 pandemic could keep inflation trending upwards.
“While a slowing economy would help to bring down inflation through the steeper slope of the Phillips curve, elevated short-term inflation expectations…could keep boosting inflation to a larger extent than they had during the pre-pandemic period,” research economist Ina Hajdini writes in the paper Trend Inflation and Implications for the Phillips Curve.
In her paper, Hajdini employs innovative methods to estimate trends in inflation. According to Hajdini, in the post-pandemic economy, monetary policy may have more influence on inflation, short-term inflation expectations now matter more for current inflation than long-term inflation expectations.
The Federal Reserve System is made up of the Board of Governors in Washington, DC, and 12 regional Reserve Banks, including the Federal Reserve Bank of Cleveland. As a part of the US central bank, the Cleveland Fed participates in the development of US national monetary policy, oversees banking institutions, offers payment and other services to financial institutions and the US Treasury, and carries out numerous tasks that support Federal Reserve operations system-wide. The Bank also promotes community well-being throughout the Fourth Federal Reserve District by engaging in a wide range of research, outreach, and educational initiatives.
