Due to a recession, expected inflation this year is only 3.25%. However, the inflation rate in Year 2 and thereafter is expected to be constant at some level above 3.25%. Assume that the expectations theory holds and the real risk-free rate (r*) is 2.5%. If the yield on 3-year Treasury bonds equals the 1-year yield plus 0.5%, what inflation rate is expected after Year 1? Round your answer to two decimal places.

**I have been on this problem for an hour now. I keep trying to view examples and nothing is going right. Please help, I need a step by step walk through I am very confused. Thank you.