FOMC project even higher inflation

Fed officials have raised their estimates for inflation this week. Median Federal Open Market Committee (FOMC) members are now projecting that inflation will be 5.2 percent in 2022, up from 4.3 percent in March. The most recent correction follows a string of misses to the Fed, which has consistently underestimated how much prices have risen over the past year and a half. Since June 2020, FOMC member estimates have been rising every quarter since inflation.

The Personal Expenditure Price Index (PCEPI), the Fed’s preferred measure for inflation, grew at a compounded annual growth rate of 6.1 percent from April 2021 to April 2022. The basic PCEPI, which excludes volatile food and energy prices, increased to 48. Percent. The unusual rise in the Consumer Price Index, released last Friday, indicates a rise in PCEPI inflation for May.

FOMC estimates

It is difficult to predict how the FOMC will conduct monetary policy in the next few years. It raised its federal funds rate target by 75 basis points on June 15, although Chair Powell appears to have ruled out an increase of more than 50 basis points since the previous meeting.

The FOMC says it will continue to raise rates and reduce its balance sheet to bring inflation down to 2 percent. However, inflation is likely to remain above the Fed’s target for some time to come. Immediately following this week’s FOMC meeting, bond markets set an average inflation rate of about 2.80 percent over the next five years, down from 2.86 percent the previous week.

FOMC member estimates provide some indication of how quickly the Fed wants to reduce inflation. Members are asked to project inflation under the assumption that the Fed manages monetary policy appropriately. Therefore, estimates indicate how inflation will develop if FOMC members do what they are told to do.

The range of central, central trends, and FOMC member estimates are summarized in the Economic Estimates and reproduced in the table below. The central trend of PCEPI estimates is created by removing the three minimum and maximum estimates submitted for each period.

Table 1. The median FOMC member estimates of inflation

Moderate inflation projection
Date of projection 2021 2022 2023 2024 Long run
June 2020 1.6 1.7 2.0
September 2020 1.7 1.8 2.0 2.0
December 2020 1.8 1.9 2.0 2.0
March 2021 2.4 2.0 2.1 2.0
June 2021 3.4 2.1 2.2 2.0
September 2021 4.2 2.2 2.2 2.1 2.0
December 2021 5.3 2.6 2.3 2.1 2.0
March 2022 4.3 2.7 2.3 2.0
June 2022 5.2 2.6 2.2 2.0

Table 2. Central trend of FOMC member estimates of inflation

Inflation estimates are central trends
Date of projection 2021 2022 2023 2024 Long run
June 2020 1.4-1.7 1.6-1.8 2.0
September 2020 1.6-1.9 1.7-1.9 1.9-2.0 2.0
December 2020 1.9-1.9 1.8-2.0 1.9-2.1 2.0
March 2021 2.2-2.4 1.8-2.1 2.0-2.2 2.0
June 2021 3.1-3.5 1.9-2.3 2.0-2.2 2.0
September 2021 4.0-4.3 2.0-2.5 2.0-2.3 2.0-2.2 2.0
December 2021 5.3-5.4 2.2-3.0 2.1-2.5 2.0-2.2 2.0
March 2022 4.1-4.7 2.3-3.0 2.1-2.4 2.0
June 2022 5.0-5.3 2.4-3.0 2.0-2.5 2.0

Table 3. Range of FOMC member estimates of inflation

Inflation Estimation Range
Date of projection 2021 2022 2023 2024 Long run
June 2020 1.1-2.0 1.4-2.2 2.0
September 2020 1.3-2.4 1.5-2.2 1.7-2.1 2.0
December 2020 1.5-2.3 1.6-2.2 1.7-2.2 2.0
March 2021 2.1-2.6 1.8-2.3 1.9-2.3 2.0
June 2021 3.0-3.9 1.6-2.5 1.9-2.3 2.0
September 2021 3.4-4.4 1.7-3.0 1.9-2.4 2.0-2.3 2.0
December 2021 5.3-5.5 2.0-3.2 2.0-2.5 2.0-2.2 2.0
March 2022 3.7-5.5 2.0-2.5 2.0-2.2 2.0
June 2022 4.8-6.2 2.3-4.0 2.0-3.0 2.0

The average FOMC member inflation forecast for 2022 increased 0.9 percentage points between March and June. Estimates are now between 4.8 and 6.2 percent, with a central trend of 5.0 to 5.3 percent. In March, estimates were 3.7 to 5.5 percent, with a central trend of 4.1 to 4.7 percent.

Forecast value

The higher-than-expected inflation rate over the next three years indicates that prices will be much higher than previously expected by Fed officials. We predict prices from the estimates of FOMC members under the assumption that (1) FOMC members set monetary policy consistent with their estimates, (2) inflation persists month to month, and (3) there is no unforeseen impact on the economy over the forecast period. The forecasts from the estimates made from December 2020 are presented in Figure 1 with the real time series from January 2020 to April 2022.

Figure 1. Prediction of price level from FOMC member estimates

Our forecast of the price level based on the estimates of the average FOMC member indicates that prices will be about 12.7 percent higher in January 2023 than they were in January 2020, just before the epidemic. This is an annual compounded rate of 4.0 percent inflation from January 2020. In March, the average FOMC member’s estimated value will be only 11.7 percent higher in January 2023 – a compounded annual growth rate of 3.7 percent since January 2020.

The average FOMC member now projects that the price level in January 2024 will be 15.6 percent higher than it was in January 2020 – from 14.7 percent in March. By January 2025, prices are projected to rise 18.1 percent Based on current estimates, one can expect average 3.3 percent inflation between January 2020 and January 2025 10 10 basis points higher than the average FOMC member estimated in March and 130 basis points higher than the Fed’s average inflation target.

It seems clear that the Fed has abandoned the simple meaning of its average inflation target. Inflation has been above the target for more than a year. The Fed does not want to offset this period of above-target inflation with inflation below the target to ensure that average inflation is within the target. It is not even committed to bringing inflation down to 2 percent very quickly. Median FOMC members are currently projecting that inflation will remain above the target until 2024.

We became accustomed to high inflation. We will probably deal with it year after year.

William J. Luther

William J. Luther

William J. Luther is the director of AIER’s Sound Money Project and an associate professor of economics at Florida Atlantic University. His research primarily focuses on the question of currency acceptance. He has published articles in leading Scholarly journals, including the Journal of Economic Behavior and Organization, Economic Inquiry, the Journal of Institutional Economics, Public Choice, and the Quarterly Review of Economics and Finance. His popular writings have been published in The Economist, Forbes and US News & World Report. His work has been featured in major media outlets including NPR, Wall Street Journal, The Guardian, Time Magazine, National Review, Fox Nation and Vice News.

Luther earned his MA and PhD. He holds a BA in Economics from George Mason University and a BA in Economics from Capitol University. She was a participant in the AIER Summer Fellowship Program in 2010 and 2011.

Selected publications

“Cash, Crime, and Cryptocurrency.” Co-author with Joshua R. Hendrickson. Quarterly Review of Economics and Finance (Upcoming).

“The independence of the central bank and the new operating regime of the Federal Reserve.” Jerry L. Co-author with Jordan. Quarterly Review of Economics and Finance (May 2022).

“Federal Reserve’s response to COVID-19 contraction: a preliminary assessment.” Nicholas Kachanowski, Brian Katsinger, Thomas L. Co-author with Hogan and Alexander W. Salter. Southern Economic Journal (March 2021).

“Is Bitcoin Money? And What Does That Mean?” Co-author with Peter K. Hazlett. Quarterly Review of Economics and Finance (August 2020).

“Is Bitcoin a Decentralized Payment Mechanism?” Co-author with Shawn Stein Smith. Institutional Economics Journal (March 2020).

“Money with endogenous matching and random cost choice.” Thomas L. Co-author with Hogan. BE Journal of Theoretical Economics (June 2019).

“Adaptation and central banking.” Co-author with Alexander W. Salter. Public choice (January 2019).

“Down from the ground: the case of Bitcoin.” Institutional Economics Journal (2019).

“Ban Bitcoin.” Co-author with Joshua R. Hendrickson. Journal of Economic Behavior and Organization (2017).

“Bitcoin and Bailout.” Co-author with Alexander W. Salter. Quarterly Review of Economics and Finance (2017).

“The Political Economy of Bitcoin.” Co-authors with Joshua R. Hendrickson and Thomas L. Hogan. Economic research (2016).

“Cryptocurrency, network impact and switching costs.” Contemporary economic policy (2016).

“Positively valuable Fiat money after the disappearance of the sovereign: the case of Somalia.” Lawrence H. Co-author with White. Behavioral Economics Review (2016).

“The financial system of stateless Somalia.” Public choice (2015).

Books by William J. Luther

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Morgan Timman

Morgan Timman is a graduate student in economics at the University of Florida Atlantic and co-author of the FAU’s monthly inflation report.

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