Ever since Paul Volcker's Federal Reserve defeated high inflation in the 1980s, there have been sporadic rumors of the old monster's return. The murmurs are getting louder now.

The Fed has flooded the economy with money since the pandemic hit, and promised to keep interest rates low until inflation rises above 2 percent and stays there. The federal budget deficit is large and Congress is considering relief legislation that would make it still larger. Market-based indicators of expected inflation have been rising.


It certainly has not spiked yet. The measure of inflation that the Fed targets, the Personal Consumption Expenditure Price Index (which tracks the cost of food, housing, clothing and more), was well below 2 percent in 2020. So inflation hawks have highlighted the difference in yields between Treasury bonds that are adjusted for inflation and those that are not. That difference has been rising in a way that seems to imply that the market is forecasting inflation a little above 2 percent.

But the Treasury ties its inflation-adjusted bonds to a different measure, the Consumer Price Index, and it typically runs higher than Personal Consumption Expenditure inflation. More important, the Fed's own purchases of these bonds has made the market for them more liquid, thus decreasing their yield.

Take account of such factors, and the forecast for the average inflation rate over the next five years is under 1.5 percent, well below the Fed's target for action. For all of the recent alarms sounded about inflation, expectations are below where they were before the pandemic started.

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