In recent years, inflation has changed in a number of ways:

• Movements in inflation now convey less about future inflation. In the late 1970s and early 1980s, the most accurate forecast of future inflation was an average of inflation over the past few quarters. Sharp increases in inflation took a long time to reverse. Since the mid-1980s, shocks to inflation have not lasted long. Thus, the best estimate of future inflation is a very long average of past inflation.

• The correlation between inflation and unemployment has decreased. In the 1960s and 1970s, inflation tended to rise in periods when unemployment was low and vice versa. Starting in the 1980s, this correlation weakened substantially. Thus, a rapidly expanding economy will tend to generate a smaller increase in inflation. However, once inflation increases, it will be more difficult to get it under control, since the economy will have to slow more to reduce inflation.

• Changes in energy prices have less impact on inflation. In the 1970s, increases in energy prices had a significant impact on core inflation, which is the change in consumer prices excluding food and energy. Since the early 1980s, energy price changes have had little impact on core inflation.

• Economic volatility has decreased significantly in the United States. Since the mid-1980s, output growth has been 50% less volatile, and employment growth has been two-thirds less volatile than the previous three decades (Source: Business Review, Quarter 1, 2007). Inflation's volatility has also fallen substantially.

Inflation expectations significantly influence actual inflation. Long-term inflation expectations vary over time, depending on economic developments and current and past monetary policy. U.S. monetary policy has become much more focused on low inflation, and the Federal Reserve has been strongly committed to keeping inflation under control. During the 1980s and 1990s, the Federal Reserve brought inflation down from double-digit levels to approximately 2%, a level that has been maintained for the past decade.

The Federal Reserve has done such a good job that expectations about future inflation have moderated significantly in recent years. Thus, when there is a shock to inflation, the public believes that the Federal Reserve will control the situation, so expectations about future inflation do not change much, keeping inflation under control. A recent example is the substantial increase in oil prices, which has not led to increased inflation or a recession, as it did in the 1970s.

Will low inflation persist for the foreseeable future? Like all questions about the future, this cannot be easily answered. Inflation now reacts less persistently to shocks, which is a result of better monetary policy and inflation expectations. Now that the public believes that the Federal Reserve will keep inflation under control, it acts in a manner that makes the economy more stable. Thus, it would seem that interest rate changes do not need to be as great to achieve stable inflation. But these circumstances will only last as long as monetary policy meets the public's expectations. Long-run inflation expectations must be monitored closely, and the Federal Reserve must respond aggressively to shocks that could have long-term impacts on inflation.