On April 18, contrary to the tendency of many Fed officials to use long-term inflation expectations data as a tool for judging real-world price pressures, a report released by the Cleveland Fed on Monday said that short-term expectations may be more worthy of attention now.
In the current environment, “the relationship between current inflation and short-term inflation expectations is much stronger than the relationship between current inflation and longer-term inflation expectations,” the bank’s economist Ina Hajdini wrote in a commentary.
From early 2021 to the end of 2022, annualized trend inflation was 3.3%, but reached 3.4% in the fourth quarter of last year, well above the Fed’s 2% target, she said.
Short-term inflation expectations readings were higher than fourth-quarter inflation readings, and the data suggested that a rise in short-term inflation expectations above trend inflation could lead to higher actual inflation, and the two have recently become more closely linked.