The U.S. Inflation Expectations Game

The U.S. Inflation Expectations Game by Michele Mazzoleni, Research Affiliates

Key Points

1. We believe the Federal Reserve is overstating the importance of falling inflation expectations, which have become disconnected from the Fed’s target and shown to be poor predictors of CPI inflation.
2. We propose a bottom-up approach to forecasting that is independent of the expectation proxies. Our approach suggests that inflation will reach the 2% target by year-end 2016, a significantly higher forecast than what is currently expected by swap and TIPS markets.
3. Deflationary risks in the United States are minimal, and investors should anticipate that the Fed will achieve its inflation target sooner than otherwise suggested.

U.S. Federal Reserve officials have expressed concerns about falling inflation expectations, which according to their...