Similarly, “breakeven inflation” measures derived from inflation-indexed Treasury securities are based on the CPI and include time-varying risk and term premiums in addition to expectations of inflation.8 To address the lack of direct comparability of different measures of inflation expectations, I compare readings over the past two years to the levels observed during 2014-2020, after the FOMC’s announcement of a 2 percent long-run goal and before the onset of rising inflation in the spring of 2021. The level of longer-run expectations in the SPF has consistently stayed very close to the FOMC’s 2 percent goal. The other measures have generally stayed within pre-pandemic ranges, with most recent readings only slightly higher than corresponding average levels from 2014-2020. The upper portion of Table 1 provides statistics on these comparisons. Interestingly, during the period of sustained low inflation before the pandemic, the market-based and Michigan measures declined, and their current levels are similar to those seen prior to that decline. Assessment of the uncertainty criterion for well-anchored inflation expectations is more challenging given data limitations. In theory, prices on inflation options contracts could be used to infer investors’ distributions of beliefs about future inflation.9 However, there have been virtually no trades recorded in the U.S. market for inflation caps and floors since 2015. Over that time, the “prices” reported for these options were based on models—not transaction prices—and cannot be used to measure investors’ inflation uncertainty during the current episode.

For example, the FOMC’s Statement on Longer-Run Goals and Monetary Policy Strategy, issued in January 2012, set a 2 percent longer-run inflation goal. It declared: “Communicating this inflation goal clearly to the public helps keep longer-term inflation expectations firmly anchored, thereby fostering price stability and moderate long-term interest rates and enhancing the Committee's ability to promote maximum employment in the face of significant economic disturbances.”1 The 2 percent longerrun goal and the importance of well-anchored inflation expectations were reaffirmed in the FOMC’s updated Goals and Strategy statement released in 2020.2 Theory It is one thing to say that anchored inflation expectations are important, but what do we mean by well-anchored expectations, and how would we know if they are well anchored? I will start by describing some theoretical implications of well-anchored inflation expectations, and then turn to an empirical assessment based on U.S. data from the past few years. My thinking on this issue is based largely on a series of research papers I wrote with Athanasios Orphanides. We used models with adaptive learning to contrast the predicted behavior of inflation and inflation expectations in two environments: when the public anchors its expectations on the central bank’s long-run target and when the public’s perception of the central bank’s target evolves depending on incoming data.3 This analysis and related studies imply three criteria for well-anchored inflation expectations: “sensitivity,” “level,” and “uncertainty.” Let me take each in turn.