Inflation Expectations trending lower… predicted by Neo-Fisherian model

update inflation expectations

Link to graph

The graph shows that inflation expectations are still trending lower. This trend is consistent with the Neo-fisherian view that over time, as the Fed rate stays stuck at a low rate, the expected inflation will trend lower as the real rate seeks to rise to its natural level.

We have seen in the past month that the Fed is not able to raise the Fed rate. Thus the projected Fed rate at full-employment is expected to be lower. The result is that inflation expectations should go lower according to the dynamics of the Fisher Effect.

Below is a video that I made in November of last year. Using a dynamic model of the Fisher Effect, it explains why expected inflation is still dropping even with the Fed rate stuck at the zero lower bound. (The numbers in the video for expected inflation, the projected Fed rate at full-employment, estimated natural real rate are very applicable to today’s views.)

When I posted this video last year, I predicted…

“The video at the very end shows the case for what many of us are projecting now… That the Fed rate will not be able rise next year, nor even 2016.” (link)

From the graph above, we are seeing that inflation expectations are still trending lower.

Link to video

Comments (1) | |