The U.S. Inflation Expectations Game

The U.S. Inflation Expectations Game by Michele Mazzoleni, Research Affiliates Key Points We believe the Federal Reserve is overstating the importance of falling inflation expectations, which have become disconnected from the Fed’s target and shown to be poor predictors of CPI inflation. We propose a bottom-up approach to forecasting that is independent of the expectation proxies. Our approach suggests that inflation will reach the 2% target by year-end 2016, a significantly higher forecast than what is currently expected by swap and TIPS markets. Deflationary risks in the United States are minimal, and investors should anticipate that the Fed will achieve…