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Inflation’s Last Half Mile: Higher for Longer?

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  • Randal J. Verbrugge

Abstract

Will inflation quickly return to the FOMC’s target of 2 percent? I explore this question through the lens of the Verbrugge and Zaman (2023) model—the VZ model—a structural model whose forecasts are competitive with hard-to-beat forecasting models. The time it takes to get to the target depends on the persistence of inflation, and theory gives mixed signals about whether inflation persistence is currently high or low. The VZ model distinguishes between two sources of inflation persistence, extrinsic and intrinsic, and implies that inflation has high intrinsic persistence. If the extrinsic forces that have lately been pushing down inflation, notably, the resolution of supply chain issues, have run their course, then the last half mile could take several years.

Suggested Citation

  • Randal J. Verbrugge, 2024. "Inflation’s Last Half Mile: Higher for Longer?," Economic Commentary, Federal Reserve Bank of Cleveland, vol. 2024(09), pages 1-8, May.
    • Handle: RePEc:fip:fedcec:98309
    DOI: 10.26509/frbc-ec-202409
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    References listed on IDEAS

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    1. Erceg, Christopher J. & Levin, Andrew T., 2003. "Imperfect credibility and inflation persistence," Journal of Monetary Economics, Elsevier, vol. 50(4), pages 915-944, May.
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    3. Erin E. Crust & Kevin J. Lansing & Nicolas Petrosky-Nadeau, 2023. "Reducing Inflation along a Nonlinear Phillips Curve," FRBSF Economic Letter, Federal Reserve Bank of San Francisco, vol. 2023(17), pages 1-5, July.
    4. David E. Lebow & Ekaterina V. Peneva, 2024. "Inflation Perceptions During the Covid Pandemic and Recovery," FEDS Notes 2024-01-19-3, Board of Governors of the Federal Reserve System (U.S.).
    5. Jeffrey C. Fuhrer, 2006. "Intrinsic and Inherited Inflation Persistence," International Journal of Central Banking, International Journal of Central Banking, vol. 2(3), September.
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