The text states that the Committee “expects inflation to rise gradually toward 2% over the medium term as the labor market improves further….” Why would the FOMC expect inflation to rise because of improvements in the labor market?

Because a better labor market means that more people are employed and earning a salary. This increase in the number of people employed will drive consumption, which in turn, will push prices of goods and services because supply is likely to fall short of demand in the short-term.

This in turn will cause a moderate rise in inflation, just like the FOMC expects.

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