Theory suggests that inflation expectations – which presumably are linked to the central bank’s inflation goal – should play an important role in actual price setting. 19 Indeed, the contours of these series are strikingly similar, which suggests that the estimated trend in inflation is in fact related to households’ and firms’ long-run inflation expectations.
20  16  Several other approaches are commonly used to abstract from the short-term volatility of overall inflation and thereby better discern its medium-term direction.