The Ever-Changing Challenges to Price Stability

US inflation risk is non-symmetric and varies considerably over time. Monetary and fiscal policies along with non-policy factors, such as unit labor costs, long-run interest rates, the unemployment gap, and commodity prices, are key drivers of the inflation risk. Macroeconomic predictors affect the long-run mean of inflation chiefly by influencing the shape and the skewness of the predictive distribution of long-run inflation. Inflation stabilization requires periodic revisions to the monetary and fiscal framework to counterbalance persistent shifts in the inflation risk. Failing to offset the inflation risk led to the large upside inflation risk of the 1960s and the 1970s. Our findings suggest that the Phillips curve is nonlinear and its slope is affected by policy and non-policy factors that have bearings on short-term volatility and risk of inflation.