Inflation in the United States began to rise in early 2021 and remained elevated even after its peak in 2022. While disruptions during the COVID-19 pandemic, such as supply chain issues and increased demand for goods, initially drove up prices, inflation related to goods decreased rapidly after mid-2022. However, overall inflation, which includes both goods and services, has declined at a slower pace and continues to stay above the Federal Reserve’s target of 2 percent.
Research indicates that inflation can persist not only due to ongoing economic shocks but also if monetary policymakers are slow to respond to what they believe are temporary increases in inflation. Financial markets may interpret a delayed or weak policy response as a general reluctance to address rising inflation, which can affect their expectations.
Luigi Bocola and colleagues (2024) analyzed how financial markets perceived the Federal Reserve’s actions during the post-pandemic period. They developed an “inflation feedback parameter” that reflects how much financial markets expect policymakers to adjust interest rates when inflation deviates from the central bank’s target. According to their findings, between 2017 and 2019, a one percentage point increase in expected future inflation led markets to anticipate a 1.9 percentage point rise in nominal interest rates. During 2020–22, this response weakened; markets expected only a 1.1 percentage point increase for the same change in inflation expectations. By 2023–26, after the Federal Reserve raised rates and maintained tighter policy, market expectations of the policy response became stronger again.
Other research by Doh and Yang (2023) suggests that when financial markets expect smaller changes in policy rates following shifts in inflation, current inflation tends to be more closely linked with future inflation. This relationship can prolong periods of high inflation because monetary policy is less effective at curbing it.
Sargent and Williams (2025) argue that if policymakers assume low inflation persistence without considering how their own actions shape this outcome, they risk underestimating how long higher inflation might last after what they view as temporary shocks. If subdued policy responses become embedded in private sector expectations, it can lead to even greater persistence of inflation.
The experience since the COVID-19 pandemic illustrates these dynamics: initial shocks faded quickly for goods but overall price pressures have been more resistant due partly to perceptions of weaker monetary policy responses.
“The views expressed are those of the authors and do not necessarily reflect the positions of the Federal Reserve Bank of Kansas City or the Federal Reserve System,” said Taeyoung Doh, senior economist at the Federal Reserve Bank of Kansas City, and Stephen Vasiljevic, research associate at the bank.
