Board of Governors of the Federal Reserve System

Percent

Percent

Percent

Figure 4: Unanchored Inflation Expectations

Figure 4 plots the inflation rate on the y axis and the unemployment rate on the x axis. There is a vertical line, with a label of $$U^*$$ on the x axis, that represents the long-run Phillips curve. There are three downward sloping lines, all with the same, constant slope. The lowest line, a blue solid line, is labeled $$\pi^e=2%$$, representing the short-run Phillips curve when inflation expectations are 2%. The middle line, a red dashed line, is labeled $$\pi^e=3%$$, representing the short-run Phillips curve when inflation expectations are 3%. The top line, a green dash-dotted line, is labeled $$\pi^e=4%$$, representing the short-run Phillips curve when inflation expectations are 4%.

The three lines have a dot on them at an arbitrary, but same, value of unemployment that is less than $$U^*$$. So the dots have the same x-value of the unemployment rate, but different y-values of inflation. With the blue dot lower (on y axis) than the red dot, than the green dot.

Figure 5: Frequency of Price Changes

Figure 5 plots the inflation rate on the y axis and the unemployment rate on the x axis. There is a vertical line, with a label of $$U^*$$ on the x axis, that represents the long-run Phillips curve. There are two downward sloping curves. Both have the same inflation expectations of 2%. And, both intersect the long-run Phillips curve at the same point, where inflation is 2% and the unemployment rate is $$U^*$$. The first curve, blue solid, has a gentle slope. This curve represents the short-run Phillips curve when there are infrequency price changes. The second curve, red dashed, has a steeper slope. This curve represents the short-run Phillips curve when there are frequency price changes.

The two curves cross. For values of the unemployment rate less than $$U^*$$ the frequent price changes curve (red dashed curve) lies above that for infrequency price changes curve (the blue solid curve). So, for a given level of the unemployment rate, the frequent price changes curve lies above the infrequent price change curve. This point is made by showing dots on the two curves. These dots have an arbitrary, but same, value of unemployment that is less than $$U^*$$ and the associated inflation rate on the blue line is less than that on the red line. For values of the unemployment rate greater than $$U^*$$ the red dashed curve lies below the blue solid curve.

MPR Figure 8. Measures of inflation expectations

Monthly

Percent

Quarterly

Percent

MPR Figure 9. Inflation compensation implied by Treasury Inflation-Protected Securities

Series: 5-to-10-year and 5-year
Horizon: January 4, 2010, to February 28, 2023

Description: A line chart with two curves over January 4, 2010, to February 28, 2023. Units are percent, and the data are daily. The 5-to-10-year series begins around 3.25 in January 2010, decreases to about 2.25 by mid-August 2010, and then increases back to about 3.25 by December 2010. The series then fluctuates between approximately 2.75 and 3.25 throughout the first eight months of 2011 before dropping almost to 2 in September 2011, reaching nearly 3 in March 2012, and dropping to about 2.5 in June 2012. The series then moves up to about 3 by January 2013 before it steps down to a bit below 1.5 through June 2016. The series then grows to about 2 in January 2018, moderates to about 1.5 by the end of February 2020, and then falls below 1 in March 2020 before returning to about 1.5 in April 2020. The series then steadily climbs to about 2.5 by May 2021 before edging down below 2.25 in September 2021. The series then fluctuates between approximately 2 and 2.5 throughout mid-April 2022 before briefly hitting 2.6 in late April, dropping to just above 2 in late May, and returning to just above 2.25 in mid-June 2022. The series then fluctuates between about 2.3 and 1.9 for the next four months of 2022 before edging up to 2.5 by November 2022. The series then declines steadily to about 1.9 in mid-December 2022 before rising slowly to about 2.5 by the end of February 2023.

The contour of the 5-year series is similar to that of the 5-to-10-year series from January 2010 through January 2016, except that it starts at about 2, more than 1 percent lower than the 5-to-10-year series, and remains noticeably below the 5-to-10 year series through 2015. Then from early 2016 through February 2020, they are nearly identical. The 5-year series subsequently falls to just above 0 by mid-March 2020 before jumping to around 2 in January 2021, surpassing the 5-to-10-year series, and then ramps up to more than 3 in November 2021. The series retreats slightly to about 2.75 by December 2021 and remains around there through most of February 2022. In late February 2022 and through March 2022, the series begins to rise, peaking around 3.5 in late March 2022. The series drops briefly to around 3.2 in early April before increasing again to roughly 3.4 in late April 2022. From there, it decreases to just below 3 in mid-May and remains roughly between 2.8 and 3.1 through mid-June 2022. The series then falls to about 2.1 by the end of September 2022 before rebounding to about 2.5 in early November 2022. The series then follows the 5-to-10-year series closely until the end of 2023, ending at about 2.5.

Fraction