About longer term inflation expectations remaining stable

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Regarding inflation, as I mentioned earlier, the recent effects of lower prices for crude oil and for imports on overall inflation are expected to wane during this year. Combined with further tightening in labor and product markets, I expect inflation will move toward the FOMC's 2 percent objective over the next few years. Importantly, a number of different surveys indicate that longer-term inflation expectations have remained stable even as recent readings on inflation have fallen. If inflation expectations had not remained stable, I would be more concerned because consumer and business expectations about inflation can become self-fulfilling.

Explain why the FOMC is concerned not only about actual recent inflation rates as measured by the CPI, but also about longer term inflation expectations remaining “stable” In particular, what is the problem if inflation expectations start to converge to an opinion that inflation will fall to “0” or less?

Reference no: EM13815895

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