Nonetheless, I still expect inflation to move back up to our target over the next couple of years. With a strengthening economy, special factors dissipating, wages on the rise, inflation expectations stable at 2%, and, full employment right around the corner, I see all the factors in place to meet our inflation goal by the end of next year (see Nechio 2015). But the point of being data dependent is that information drives your decisions; and while my forecast looks great, I am wary of acting before gathering more evidence that inflation’s trajectory is on the desired path.
All in all, things are looking good. I see growth on a solid trajectory, full employment just in front of us, wages on the rise, and inflation gradually moving back up to meet our goal. I can’t tell you the date of liftoff, but I can say that it’s going to be an interesting rest of the year for monetary policy, and the Fed in general.
What it really looks like:
Falling unemployment amidst a labor force “dead in the water” is very different from falling unemployment with a growing labor force
Wages lag far behind previous expansions
And inflation may be going somewhere, but surely not 2%