Policy makers watch expectations because they can fuel actual inflation. Businesses may raise prices in anticipation of higher production costs, while consumers can demand higher wages to keep up with the price of goods. Unless restrained by central banks, the two processes together can accelerate inflation.

"It is much harder to keep inflation in check if people begin to raise their expectations of inflation," Dudley said in his May 19 speech.

Inflation is a "mindset," and consumers build their expectations into their behavior, said Ward McCarthy, chief financial economist at Jefferies & Co. in New York. While breakeven rates are within the Fed's target range, "they're right on the frontier. There's not a lot of breathing room."

'Important Force'

Inflation expectations, especially long-run projections, "are an important force in inflation dynamics," according to a 2008 research paper from the Federal Reserve Bank of Kansas City by Todd E. Clark, who's now a vice president at the Cleveland Fed, and Troy Davig, now a senior economist at Barclays Capital in New York. "Even small movements in long-run expectations can represent a persistent source of pressure on inflation," they wrote.

The authors cite as evidence several studies showing a link. The Fed's own computer model of the U.S. economy uses long-run expectations, as measured by surveys of professional economists, as a "key determinant of inflation behavior," Clark and Davig said.

The central bank aims for an inflation rate of about 1.7 percent to 2 percent, based on last month's long-run economic projections of Fed governors and regional presidents.

Jeans, Hamburgers

Prices in March rose 1.8 percent from a year earlier, accelerating for a fourth straight month to the fastest pace since May 2010, as companies from San Francisco-based jeans supplier Levi Strauss & Co. to Oak Brook, Illinois-based fast- food chain McDonald's Corp. announced price increases to make up for rising prices of cotton, wheat and other raw materials.

Excluding food and fuel, prices rose 0.9 percent in March from a year earlier, near a five-decade low of 0.7 percent. Fed officials prefer the so-called "core" measure because food and fuel costs are more volatile.

Inflation, including all items, has averaged 2.1 percent a year over the past 10 years, and the same rate over the prior decade. It was 4.8 percent during the 1980s and 6.7 percent in the 70s, based on the Commerce Department's personal consumption expenditures price index.