During a speech on inflation and Fed policy at UMass Amherst on Thursday, Federal Reserve Chair Janet Yellen indicated that she and other Federal Open Market Committee members want to raise interest rates by the end of the year.
Her presentation included 9 charts examining different aspects of inflation. And while she said she expects inflation to return to the Fed’s target of 2% annual growth, one chart illustrated the unpredictability of achieving that goal.
The chart, which Yellen said “may be instructive,” shows the difference between the consensus forecast for long-term inflation for Japan against the country’s actual inflation over the same timeframe.
While expectations for inflation between 1991 and 2015 were positive, the country experienced slight deflation from around 2001 onward, only recently returning to positive price inflation.
Yellen says this sort of unexpected deflation would be a worrying for the Fed.
“The explanation for the persistent divergence between actual and expected inflation in Japan is not clear, but I believe that it illustrates a problem faced by all central banks: Economists’ understanding of the dynamics of inflation is far from perfect,” she said. “Reflecting that limited understanding, the predictions of our models often err, sometimes significantly so. Accordingly, inflation may rise more slowly or rapidly than the Committee currently anticipates; should such a development occur, we would need to adjust the stance of policy in response.“
Also of note, the Bank of Japan also has a target of 2% inflation, and have pushed back their target to meeting that goal to mid-year 2016.
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