Several economists have recently stated that long-term inflation expectations are declining. Fed Chair Janet Yellen said last month that if that were true it could have a negative impact in consumer and business expectations, which would then making it more difficult for the Fed to attain its 2% inflation goal. But the Federal Reserve Bank of Atlanta has released projections that should make Yellen happy: long-term inflation expectations “remain stable and anchored.”

The analysis was put together by Nikolay Gospodinov, financial economist and policy adviser; Paula Tkac, vice president and senior economist; and Bin Wei, financial economist and associate policy adviser, all of the Atlanta Fed's research department.

The Atlanta Fed’s chart on the long-term inflation expectations plots the five-year/five-year forward TIPS breakeven inflation (BEI) and the model-implied inflation expectations (IE) for the period January 1999–November 2015 at a weekly frequency. After making an adjustment for the inflation risk premium, we term the difference between BEI and IEs a "liquidity premium," but it really includes a variety of other factors. Our more careful look at the liquidity premium reveals that it is partly made up of factors specific to the structure of inflation-indexed TIPS bonds. For example, since TIPS are based on the non-seasonally adjusted consumer price index (CPI) of all items, TIPS yields incorporate a large positive seasonal carry yield in the first half of the year and a large negative seasonal carry yield in the second half. Chart 2 illustrates this point by plotting CPI seasonality (computed as the accumulated difference between non-seasonally adjusted and seasonally adjusted CPI) and the five-year breakeven inflation.

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