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Long-Run Average Inflation

Macro Minute
October 17, 2023

The Federal Reserve targets headline personal consumption expenditure (PCE) inflation that averages 2 percent over time. In the most recent PCE inflation reading for August, headline inflation rose 0.4 percent monthly (a 4.8 percent annualized rate), raising year-over-year PCE inflation to 3.5 percent from 3.4 percent in July. Taking out the effect of volatile food and energy prices, the core PCE price index rose 0.1 percent monthly (a 1.7 percent annualized rate), lowering year-over-year core inflation to 3.9 percent from 4.3 percent in July. How does the latest monthly data affect progress versus the Fed's long-run 2 percent average inflation target?

To compute average annual inflation over longer periods, we calculate annualized percentage changes in the PCE price index between two dates. Figure 1 below shows a plot of annualized inflation between a given starting date (shown on the horizontal axis) and August 2023. Headline PCE inflation is the dashed blue line, and core inflation is the solid orange line. For example, the July 2023 reading corresponds to the annualized inflation rate between July 2023 and August 2023.

Figure 1: Annualized Inflation Through August 2023

Chart showing annualized inflation between January 2007 and August 2023.

Source: Author’s calculations using Bureau of Economic Analysis data via Haver Analytics

When considering average inflation over longer periods of time, some dates stand out. In January 2012, the Federal Open Market Committee (FOMC) adopted an explicit 2 percent inflation target. The goal was to keep longer-term inflation expectations firmly anchored around this level to support the FOMC's price stability mandate. According to Figure 1, between that date and August 2023, headline PCE inflation has been 2.2 percent per year, and core inflation has been 2.3 percent per year, on average.

A second significant date is September 2020, when the FOMC revised its Statement on Longer-Run Goals and Monetary Policy Strategy. In this update, the FOMC adopted a flexible average inflation target — seeking to achieve inflation that averages 2 percent over time — and stated that "following periods when inflation has been running persistently below 2 percent, appropriate monetary policy will likely aim to achieve inflation moderately above 2 percent for some time." As seen in Figure 1, since this revised statement was released, headline PCE inflation has run at a pace of 5 percent per year, and core inflation has run at a pace of 4.4 percent per year, on average.

Notably, in its update, the FOMC did not define the window of time over which it would be looking back to assess progress toward its goal. By looking back far enough, it's possible to identify starting dates where average inflation through the present day has come in exactly at target. For example, Figure 1 shows that when considering inflation from October 2008 through August 2023, headline PCE inflation averaged about 2 percent per year on average, right on target.

Views expressed in this article are those of the author and not necessarily those of the Federal Reserve Bank of Richmond or the Federal Reserve System.

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