Undershooting inflation

Scott Sumner has a post up today that references a prediction market's estimate of inflation over the next five years (from a NYT article by Justin Wolfers). The prediction market is telling us the Fed will undershoot its inflation target. I commented on Sumner's post, but here is the information transfer model's prediction of the same thing. The latest update for the prediction itself is here. I generated 1000 random paths (using both a Gaussian and empirically derived probability distribution [1] for the errors), and integrated them over the next 5 years to produce a 5-year inflation prediction [2].

Here are the first 200 of those 1000 random paths:

And here is the resulting prediction using roughly the same graph as the NYT article (which I adjusted using Sumner's PCE inflation correction of -0.35% [3]):

Here it is with higher resolution for the IT model prediction:

Footnotes:

[1] The empirical distribution didn't come up with a very different result, so I am only showing the normal distribution results.
[2] Note that the 5-year prediction is right in the sweet spot of the IT model's capability.
[3] The prediction market used CPI inflation, so I adjusted the distribution to show PCE inflation by fitting an empirical distribution to the CPI prediction market data and shifting that distribution by 0.35%, per Scott Sumner's adjustment in his post linked at the top of this post.