Board of Governors of the Federal Reserve System

Figure 4.1 Inflation predictions: Hot/Cold models, out-of-sample, 2020-3Q 2022

Line chart, 1Q 2019 to 3Q 2022. Units are percent change from the same month one year ago. The five series are Actual inflation, as measured by the Personal Consumption Expenditures price index excluding food and energy, u-gap (u-u*) models from both the stable inflation period (1985 to 2019) and pre-pandemic period (1962 to 2019), and v/u-gap (v/u-v/u*) models from both the stable inflation period (1985 to 2019) and pre-pandemic period (1962 to 2019). Actual inflation begins between 1.5% and 2%, falls to 1% in late 2Q 2020, and climbs over the next two years to a peak of just over 5% in late 1Q 2022. It remains near this value for the rest of the series. The four other series track closely near 1.5% until 1Q 2021 when the pre-pandemic period series begin to increase more rapidly. The pre-pandemic v/u-gap series accelerates a little faster and ends at a maximum of just below 4%, while the pre-pandemic u-gap series ends closer to 3%. Both stable inflation period models remain nearly identical and increase to approximately 2.5%.

Figure 2: Select components of core PCE inflation

Figure 3: Expected price change next 5 to 10 years

Line chart, January 1990 to February 2023. Units are percent change from the same month one year ago. The series is expected annual price change over the next five to ten years. The series begins near 4% and quickly reaches a maximum of 4.7% near the end of 1990. It then decreases rapidly to near 3% in 1998 where it will hover near until 2014. It then slowly falls to around 2.5% in 2017 and remains near that value until 2021 when the series begins to climb back to 3%. The series remains near 3% for the remainder of the figure.