The Dynamics of Long-Run Inflation Expectations: A Market-Based Perspective

RePEc Short ID: pko790
ORCID iD: 0000-0001-8464-2470

Cole, Anna; Kozlowski, Julian; Martorana, Joseph

doi:10.20955/r.2025.13

Journal Article

The Dynamics of Long-Run Inflation Expectations: A Market-Based Perspective

Abstract: This article analyzes market-based probability distributions for long-run inflation expectations derived from inflation derivatives. We construct forward-looking distributions for five-year-ahead inflation to assess the likelihood that inflation will fall above, below, or near the Federal Reserve’s 2 percent target. By examining the mean, volatility, and skewness of these distributions, we document how expectations have evolved since the onset of the COVID-19 pandemic. To assess the reliability of market-based measures, we compare our results with alternative data sources. We highlight the elevated probability of inflation exceeding the 2 percent target that persisted shortly after the COVID-19 pandemic. The findings underscore the importance of market-based tools in capturing nuanced inflation dynamics and informing policy and financial decisions.

JEL Classification: E31;

https://doi.org/10.20955/r.2025.13