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Actual and Expected Inflation in the U.S.: A Time-Frequency View

Author

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  • Yingying XU

    (School of Economics and Management, University of Scince and Technology Beijing, Beijing, P.R. China.)

  • Zhixin LIU

    (School of Economics and Management, Beihang University, Beijing, P.R. China.)

  • Jaime ORTIZ

    (Vice Provost Global Strategies and Studies, University of Houston, Houston, TX, United States.)

Abstract

This study examines the correlation between actual and expected inflation in the United States to test whether inflation expectations become self-fulfilling. Wavelet coherence analysis shows that the lead-lag linkage between actual and expected inflation varies according to factors of both frequency and time. The relationship between actual and expected inflation is more robust for frequencies longer than four years than short to medium term ones. We find leading effects of actual inflation on inflation expectations in most periods over medium and low frequencies. However, the structural changes that occurred in 2011 appear to have weakened this effect and no leading role of inflation expectations is found. Therefore, self-fulfilling inflation expectations and the “inflation-expectation” spiral do not appear to pose threats for the U.S. economy.

Suggested Citation

  • Yingying XU & Zhixin LIU & Jaime ORTIZ, 2018. "Actual and Expected Inflation in the U.S.: A Time-Frequency View," Journal for Economic Forecasting, Institute for Economic Forecasting, vol. 0(1), pages 42-62, December.
    • Handle: RePEc:rjr:romjef:v::y:2018:i:1:p:42-62
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    More about this item

    Keywords

    inflation; expectation; self-fulfillment; wavelet analysis; time domain; frequency domain;
    All these keywords.

    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations

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