Low Inflation and Inflation Expectations

The BLS recently released the new CPI and inflation statistics. This signals a weakening economy along the lines of Tim Duy's analysis. As Mark Thoma points out, the Fed does not have a lot room to defend the economy against a recession, and congress seems incapable of doing anything at the moment. The WSJ Economic Forecasters expectations indicate further trouble, since they are above actual inflation, but are dropping:

If lower inflation expectations exist in the rest of the economy we can expect slower growth in the coming months. Lower inflation expectations usually are a self fulfilling prophecy, since workers, firms, and households make decisions that reinforce the low inflation future. For example, firms might anticipate lower revenues and therefore lower prices in order to drive up sales.

How do these lower inflation expectations fit into the larger long term picture? Well, the same analysts forecast GDP growth at 2.38 and 1.94 in the 2018 and 2019, respectively. In addition, my previous post on Fed funds rate expectations uncertainty indicates that Federal Reserve credibility (at least in terms of future interest rates) has improved. Inflation expectations for 2017 are low, but expectations for 2018 and 2019 are both firmly above 2 percent. This suggests that analysts believe the economy will slow down in the next two years and that the Fed will take appropriate measures (with what little room they will have) to fend off or minimize a recession.