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April 29, 2022 Reading Time: 3 minutes

New data from the Bureau of Economic Analysis shows that prices continue to rise at breakneck speed—and much faster than the Federal Reserve has projected. The Personal Consumption Expenditures Price Index (PCEPI), which is the Fed’s preferred measure, grew at a continuously compounding annual rate of 6.3 percent from March 2021 to March 2022, up from 6.1 percent in the previous month. 

Prices have grown 4.0 percent per year since January 2020, just prior to the pandemic. If the Fed had instead delivered 2-percent inflation over this period, prices would be 4.6 percentage points lower today.

Figure 1. Price Level and 2-percent Growth Path

The surge in prices has caught most households off-guard. Perhaps more surprisingly, it has caught Fed officials off-guard, as well. Federal Open Market Committee members have consistently underprojected inflation since December 2020. The median FOMC member projections for inflation, which the Fed reports in its quarterly Summary of Economic Projections, are presented in Table 1. In December 2020, the median FOMC member projected inflation would be just 1.9 percent in 2022. The projection climbed to 2.6 percent by December 2021. In March 2022, when the Fed released its most recent Summary of Economic Projections, the median FOMC member projected prices would grow 4.3 percent this year.

Median Inflation Projection

Projection Date2021202220232024Longer run
December 20201.81.92.02.0
March 20212.42.02.12.0
June 20213.42.12.22.0
September 20214.22.22.22.12.0
December 20215.32.62.32.12.0
March 20224.32.72.32.0
Table 1. Median FOMC Member Projections for Inflation

Yet, even the most recent revision appears to be insufficient. Forecasts of the price level based on FOMC member projections, which Morgan Timman and I produce for our Monthly Inflation Report, are presented in Figure 2 along with the price level. Prices are currently 0.8 percentage points higher than they would be if they were in line with the median FOMC member projection made in March. They are currently on track to grow 7.1 percent this year. 

Figure 2. Price Level and Forecasts Based On FOMC Member Projections

Although Fed officials have revised up their projections for inflation considerably, they have not meaningfully changed their course of policy from what was announced last December. It is now clear that those plans were made with very optimistic projections of inflation in mind. Those projections have since been shown to significantly underestimate the extent of the problem. If the Fed were committed to bringing down inflation over the same time horizon, it would have no choice but to increase the speed or intensity of its plan to tighten. That it has not done so reveals that it is unlikely to bring inflation down as quickly as it previously suggested. Indeed, its most recent projections reflect this. The Fed now projects inflation at 2.7 percent in 2023 and 2.3 percent in 2024, up from the 2.3 and 2.1 percent projections made back in December.

The Fed seems resolved to see inflation climb further. I expect FOMC members will revise up their projections of inflation again in June. They should revise their course of action, to bring inflation down as planned, instead.

William J. Luther

William J. Luther

William J. Luther is the Director of AIER’s Sound Money Project and an Associate Professor of Economics at Florida Atlantic University. His research focuses primarily on questions of currency acceptance. He has published articles in leading scholarly journals, including Journal of Economic Behavior & Organization, Economic Inquiry, Journal of Institutional Economics, Public Choice, and Quarterly Review of Economics and Finance. His popular writings have appeared in The Economist, Forbes, and U.S. News & World Report. His work has been featured by major media outlets, including NPR, Wall Street Journal, The Guardian, TIME Magazine, National Review, Fox Nation, and VICE News.

Luther earned his M.A. and Ph.D. in Economics at George Mason University and his B.A. in Economics at Capital University. He was an AIER Summer Fellowship Program participant in 2010 and 2011.

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