reserve ’ s tolerance of such high inflation at the time. the disinflation after october 1979, carried out by the federal reserve under the leadership of paul volcker using words, procedures, and actions that were a sharp break from the past, produced a much lower cost of disinflation than policymakers had anticipated during the 1970s. i think these considerations leave us with fairly wide bounds on what the costs might be of permanently shifting long - run inflation expectations that are already anchored. on the one hand, the historical record gives us little reason to think the costs would be as minimal as the simplest models with rational expectations might suggest. on the other hand, overly pessimistic estimates have proved to be wrong in the past. okun ( 1978 ) estimated that a 10 percent reduction in real gdp for one year would reduce the inflation rate only 1. 0 percentage point. by the mid - 1980s, however, federal reserve board staff estimates of the sacrifice ratio were roughly half as large. implications for inflation forecasts i have argued here that the most attractive explanation for recent changes in inflation dynamics is that expectations have become better anchored. inflation is now less persistent and more likely to gravitate to a trend level that is determined by where long - run inflation expectations have settled. what implication does this have for forecasts of future inflation? in this framework, the first priority is to determine where inflation expectations may be anchored. this task is somewhat tricky. according to the latest reading from the survey of professional forecasters ( spf ), long - term inflation expectations are currently around 2 percent, as measured by the pce price index that the fomc has emphasized. the private forecasters appear to have held this view for many years, given that long - run expectations for cpi inflation in the spf have been running at around 2 - 1 / 2 percent since the late 1990s, and that the average historical wedge between the cpi measure and the pce measure of inflation has been about 50 basis points. of course, the views of professional forecasters may not be representative of what the average person or firm is thinking. if we turn to the financial markets, we find that inflation expectations extracted from a comparison of the yields between treasury inflation - protected securities ( tips ) and standard treasury securities seem consistent with an anchor at or perhaps a little above 2 percent in terms of pce inflation. 14 i say “ seem consistent, ” because we cannot be sure about at least one of the items used

inflation to be less responsive to shocks, particularly if they are transitory. in this way, monetary policy may have affected the slope of the phillips curve without having affected the manner in which expectations are formed. also, from the mid - 1980s through the first years of this decade, energy price movements were smaller and more transitory. we see this in futures markets, in which oil prices in far - dated futures contracts moved much less than spot prices over this period, suggesting that people expected a quick reversal in any rise in oil prices. such transitory shocks to energy price would presumably have a smaller effect on inflation than the morepersistent oil price shocks of the 1970s and early 1980s. increased globalization and other sources of increased competition may also have lowered the sensitivity of domestic inflation to aggregate demand, thereby flattening the phillips curve. however, the evidence on this last point is limited and inconclusive. policy implications these stylized facts – that inflation has become less persistent and now responds less to aggregate demand and supply shocks – can lead to inappropriate policy advice. if we take these facts to be structural and attributable to factors other than monetary policy, we might interpret them as suggesting that the federal reserve could respond less to shocks and yet be confident that inflation would remain at a low level. in addition, the smaller coefficient on unemployment gaps in traditional phillips - curve models, which seems to imply that the sacrifice ratio has gone up, might lead us to think that reducing inflation is very costly because it requires long periods of high unemployment. as a result, policymakers might decide that such an attempt would not be worthwhile and so would be less likely to try to reduce inflation if it were undesirably high. if used in model simulation exercises, the flatter phillips curve might also suggest that getting inflation down to a particular desired level could take an inordinately long time. however, if we instead attribute the observed changes in inflation dynamics to better monetary policy and a resultant better anchoring of inflation expectations, then such policy conclusions are unwarranted. under this alternative interpretation, the reason that inflation has become less persistent is that monetary policy, in carrying out its dual mandate of promoting both price stability and maximum sustainable employment, has been vigilant in maintaining a low rate of inflation on average. but if the monetary authorities were to become complacent and to think that they could get away with not reacting to shocks that, in their mistaken view, no longer have the