Working Paper

Anchored or Not: How Much Information Does 21st Century Data Contain on Inflation Dynamics?

Abstract: Inflation was low and stable in the United States during the first two decades of the 21st century and broke out of its stable range in 2021. Experience in the early 21st century differed from that of the second half of the 20th century, when inflation showed persistent movements including the "Great Inflation" of the 1970s. This analysis examines the extent to which the experience from 2000-2019 should lead a Bayesian decisionmaker to update their assessment of inflation dynamics. Given a prior for inflation dynamics consistent with 1960-1999 data, a Bayesian decisionmaker would not update their view of inflation persistence in light of 2000-2019 data unless they placed very low weight on their prior information. In other words, 21st century data contains very little information to dissuade a Bayesian decisionmaker of the view that inflation fluctuations are persistent, or "unanchored" . The intuition for, and implications of, this finding are discussed.

Keywords: Inflation; Phillips Curve; Econometric Modeling;

JEL Classification: E31; C11; E50;

https://doi.org/10.17016/FEDS.2022.016

Bibliographic Information

Provider: Board of Governors of the Federal Reserve System (U.S.)

Part of Series: Finance and Economics Discussion Series

Publication Date: 2022-03-30

Number: 2022-016