Cleveland Fed, Reports: Trend Inflation and Implications for the Phillips Curve

“The Economic Commentary highlights three results. First, trend PCE inflation started rising noticeably in 2020, and since the beginning of 2021 trend PCE inflation is measured to be above the historical average of PCE inflation of 3.3 percent (above the long-term inflation target of 2 percent). Second, the Phillips curve slope has moderately increased, implying that monetary policy actions to influence economic activity can have slightly more powerful effects on inflation, but the slope remains low in absolute terms. Third, with the rise in the estimated inflation trend, the linkages between current inflation and inflation expectations, as captured by the Phillips curve, have strengthened. The main takeaway of this Economic Commentary is that while a slowing economy would help to bring down inflation through the steeper slope of the Phillips curve, elevated short-term inflation expectations—which are estimated to have a larger impact on inflation in this model than longer-term inflation expectations—could keep boosting inflation to a larger extent than they had during the pre-pandemic period.”