Inflation's Last Half Mile: Higher for Longer?

Abstract

Will inflation quickly return to the FOMC's target of 2 percent? I explore this question through the lens of the Verbrugge and Zaman (2023) model the VZ model - a structural model whose forecasts are competitive with hard-to-beat forecasting models. The time it takes to get to the target depends on the persistence of inflation, and theory gives mixed signals about whether inflation persistence is currently high or low. The VZ model distinguishes between two sources of inflation persistence, extrinsic and intrinsic, and implies that inflation has high intrinsic persistence. If the extrinsic forces that have lately been pushing down inflation, notably, the resolution of supply chain issues, have run their course, then the last half mile could take several years.