Inflation Expectations and Inflation Persistence

This paper examines the relationship between inflation expectations and inflation persistence. Using a Markov‐switching model of U.S. inflation, we first show that higher inflation persistence is associated with a higher mean level of inflation and greater inflation uncertainty. Moreover, we obtain evidence that an increase in inflation expectations predicts the greater likelihood of being in a regime with highly persistent inflation. Thus, inflation expectations serve as an early warning indicator of the risk of persistently high inflation.