Over at TheMoneyIllusion, Scott Sumner takes a shot at what he refers to as “Disinflation Denial.” His point is that prior to the recent run-up, “commodity price indices fell by more than 50%.” Thus, if the run-up in commodity prices suggests loose policy now, they must have been signaling tight policy earlier.

I am hesitant to endorse the view that any subset of prices gives us a clear view of inflation trends. What I do endorse in the Sumner piece is the advice that “the Fed look at a wide range of indicators.” I can tell you that is exactly what we do at the Atlanta Reserve Bank and, as just one example within the Fed System, in this post I’ll review the battery of indicators that we are currently looking at here. Most of these will be no surprise, but I find it useful to occasionally see them in one place. So here we go. (Note that throughout this blog post I will focus most of my comments on the consumer price index [CPI], but most of what I say also applies to the personal consumption expenditure [PCE] price index as well.)

First up, of course, are the so-called (and often maligned) core measures of inflation. I am completely sympathetic to the view that the traditional core index, which subtracts out food and energy components, is a somewhat arbitrary cut of the price statistics. For that reason, Ipersonally tend to lean more heavily on median and trimmed-mean measures.

In Atlanta, we have been monitoring a newer core inflation measure, called the “sticky-price CPI,” jointly developed by Mike Bryan and Brent Meyer (of the Atlanta and Cleveland Feds, respectively). As described by Bryan and Meyer:

“Some of the items that make up the Consumer Price Index change prices frequently, while others are slow to change… sticky prices [those that are slow to change] appear to incorporate expectations about future inflation to a greater degree than prices that change on a frequent basis… our sticky-price measure seems to contain a component of inflation expectations, and that component may be useful when trying to gauge where inflation is heading.”

Like the other core measure, the sticky-price CPI shows a pronounced downward movement over the past several years, with some sign of (an ever-so-slight) recovery as of late.

Though I disagree with the assertion that core measures are a convenient way to ignore unpleasant movements in the overall CPI—there is evidence that core measures are useful in predicting where total CPI inflation is heading—it is almost surely a bad idea to ignore what is happening to headline statistics. (After all, in the end it is the average of all prices with which we are concerned.)

Here too, the evidence suggests, at the very least, there is scant evidence that disinflation has left the scene:

I find it useful to take at least two more cuts at the overall price data. One, which has a decidedly short-term focus, involves examining the distribution of price changes in the broad categories that make up the headline CPI. Though a popular criticism of Fed policy—discussed and critiqued at Econbrowser—tries to deflate deflation concerns by reciting a number of prices that are rising, it is obvious that one could just as easily tick off a reasonably large list of prices that are falling:

(The individual colors in the chart represent different components of the CPI. The underlying data can be found from this link to the explanation of the median CPI.)

The graph of the November price change distribution is actually somewhat encouraging. What it tells us is that almost half of the price changes in the CPI market basket, weighted by their shares of total consumer expenditures, fell in the (annualized) range of 0 percent to 2 percent. Furthermore, about as many price changes were below this range as they were above it.

A closer look at the prices that fall in the 0 percent to 2 percent category, however, reveals that individual price changes are skewed to the downside of the range:

On a month-to-month basis, the distribution of individual prices does shift around, so these statistics are nothing more than suggestive short-run snapshots (but I believe they are informative nonetheless).

At the other end of the temporal scale is a look at how inflation has behaved over time. If the central bank had a long history of missing its stated inflation objectives, we might feel very different about an inflation rate that is below what Chairman Bernanke has referred to as “the mandate-consistent inflation rate” of “about 2 percent or a bit below” than we would if average prices were hewing pretty close to the target path. As I have previously noted, over the past 15 years or so, the Federal Open Market Committee (FOMC) has delivered an average inflation rate, measured as growth in the PCE price index, that is wholly consistent with this mandate. Here’s the case in a graph, adjusting the mandate-consistent inflation rate to account for an assumed upward bias in the CPI relative to the PCE index:

Actually, those short-run complications are mostly associated with falling expectations of inflation. In my last macroblog post, I argued that the stabilization of market-based CPI inflation expectations and the associated decline in the perceived probability of deflation should arguably be counted as a success of the Fed’s current policy stance. The latest on market-based expectations was included in our previous macroblog item. For completeness, survey-based expected long-term inflation remains somewhat below the levels prior to the onset of the recession:

I believe this is basically the bottom line: whether we look at headline inflation (straight-up, component-by-component, or in terms of the long-run trend), core inflation measures (of virtually any sensible variety), or inflation expectations (survey or market based), there is little a hint of building inflationary pressure.

While I don’t dismiss the usefulness of looking at other indicators (stock prices, bond prices, foreign exchange rates, commodity prices, and real estate prices are on Scott Sumner’s list; I would add various measures of labor costs to mine), you have to be pretty selective in your attentions to build the contrary case.

But feel free. We’ll keep watching.

Photo of Dave Altig By Dave Altig
Senior vice president and research director at the Atlanta Fed

Category: Inflation

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

18 Responses to “An inflation (or lack thereof) chart show”

  1. machinehead says:

    ‘if the run-up in commodity prices suggests loose policy now, they must have been signaling tight policy earlier.’

    Well, maybe, although presumably economic expansions can expire naturally for reasons other than ‘tight policy.’ But let’s not forget that Fed Funds were cranked from 1.0% to 5.25% in13 quarter-point baby steps over two years — a rather stunning five-fold-plus increase which I believe is history’s largest, in terms of the multiple from start to finish.

    Chart 6 — presenting the lovely illusion of a carefully calibrated CPI expansion — is notable for what it omits: an epic stock market Bubble from 1995-2000, followed by a 50% smash; an epic real estate Bubble from 2002-2006, followed by a 50% smash in some areas (e.g. Las Vegas); a second 50%-plus stock smash (2007-2009); and a better than fivefold increase in the price of gold (2001-2010).

    Asset inflation, though more popular than bad old 1970s-style goods inflation, is still inflation. Gold’s inflation in dollar terms over the past decade speaks loudest of all. And of course, it’s unmentionable by Fedsters, who continue (allegedly; it’s unaudited) holding a big stash of gold, even as they deny the legitimacy of its monetary role and its unwelcome inflationary message.

    Let me reduce it to brutally simple terms: war is inflationary. Deficit spending with paper money is inflationary. QE2 is recklessly inflationary — a policy so intellectually unhinged that it likely will destroy the Fed’s independence. Fast forward to the end of 2012, and claims of disinflation will be greeted with rude guffaws. So say I. We’ll see who’s right.

  2. Petey Wheatstraw says:

    “. . . you have to be pretty selective in your attentions to build the contrary case.”

    Then why has dude not included wage/income stagnation/deflation in his analysis?

    Pretty charts, but they’d be more helpful if accompanied by average middle class wage/inclusion, unemployment rate, base money supply, government debt load and per-capita debt load charts for the same periods. Context (relativity) is everything. Prices in a vacuum don’t mean squat.


    Good analysis.

  3. furiouschads says:

    Machinehead: a huge chunk of the actual money supply vanished when people stopped believing in the non-bank banking sector. The music stopped for me when Cerberus couldn’t sell its Chrysler package.

    Since the collapse in 2008, QE and Fed expansion has added very little back. It functioned mostly as a partially successful mechanism to get us to believe that Tink won’t die. Relative to the size of the lost capital, Fed activity is tiny. And then there is velocity, which is not quite what it used to be.

    I don’t see animal spirits reviving such that inflation will be a problem. I do see 2011 austerity attempts in the UK and the USA hugely increasing the deflationary risk. And lets not forget the impact on final demand and inflation expectations of the surge of state and local government layoffs coming in 2011.

  4. ZackAttack says:

    Corn at 6 (when, all during the drought years in the 90s, it couldn’t hold $4 for more than a few days), wheat at 8.50, soybeans at 13 (when $8 was the wall in the sky for decades before), live cattle at 106, cotton at 130 (up 60% since September), sugar at 30 (up from 18 in August), copper at 4, oil almost a triple from 18 months ago, gasoline at 3, heating oil at 2.60…

    My question to you, sir, is how many people around the world die as a direct or indirect result of your misguided – and ultimately fruitless – efforts to reflate real estate assets held on bank balance sheets?

  5. Vilgrad says:

    Yes. No inflation here.

    If the price of steak goes up, you substitute ground beef, so the price didn’t go up.

    If the price of ground beef goes up, you substitute kibble, so the price didn’t go up.

    If the price of kibble goes up, you substitute possum roadkill, so the price didn’t go up.

    The bigger the lie, the more likely the masses will believe it.

    Here are the one year price increases for the masses. I guess it doesn’t impact people who vacation in the Hamptons and work at the Federal Reserve.

    Unleaded gas up 24%
    Heating Oil up 28%
    Corn up 50%
    Wheat up 48%
    Coffee up 56%
    Sugar up 27%
    Soybeans up 30%
    Beef up 26%
    Pork up 22%
    Cotton up 101%
    Copper up 33%
    Silver up 72%

    Here’s a few one month charts that aren’t manipulated by the government. 1.1% my fat ass!!!!!


  6. Jim67545 says:

    Does not the off-shoring of production of goods and services contribute to disinflation – at least as long as that trend, and the benefits (lower COGS) to that trend are sustained? Analysis like this, which is bound by US statistics, might give the misimpression that goods, say a toaster, is declining in price due to domestic forces such as cheaper money, increased efficiency of domestic production, higher efficiency as it relates to operating expenses and better management of cash flow. And so we might view disinflation as a positive indication that the economy is becoming more efficient.

    But what happens when 1. we have offshored all the jobs we practically can and 2. wages overseas begin to rise? As that source of continued disinflationary push diminishes and perhaps is replaced that with an inflationary push, what then?

    China (and its cheap labor neighbors) is like hitting a huge, cheap source of a commodity (such as we are seeing in natural gas or the impact of the highway system opening up cheap labor in the South in the 1960s.) Prices plummet until the marginal benefit has been fully exploited. Are we nearly there now?

  7. Petey Wheatstraw says:


    I can’t see the debt-saturated US letting strong dollars return to buy our hard assets and resources (they won’t be coming back to buy labor or US-made products). In our current monetary regime, inflation/deflation are policy choices, and our potential money supply is unlimited. When push finally comes to shove, we’ll inflate.

  8. Transor Z says:


    Michael Boskin and Alan Greenspan were geniuses, GENIUSES I tell you!

    Banana republics engage in the occasional redenomination (aka chop off some zeroes). People who know what they’re doing re-engineer CPI.


    “There is no change in value. The value is the same.” (h/t Kid Dynamite)

  9. furiouschads says:


    “We’ll inflate.” Maybe. The amount needed to really do this is well above what has currently been done, which is, of course, radical and crazy. I used to think things like gov’t jobs programs and infrastructure projects worked because they supplied final demand to the economy with minimal leakage abroad. But now I think that the magnitude of these projects are so small relative to the crisis that their main effect is to bolster confidence that things will work out.

    I know we shouldn’t pay attention to what the politicians say, just to what they do. Next USA fun point will be when the debt ceiling has to be raised. Before that, we will have the Irish election which may or may not support the current policy position of paying off the banking sector. After that, we will have a crisis point in the UK when their austerity starts removing public sector demand. Will private demand fill the gap? Watch for the Lib Dems to pull out of the coalition and force a new election.

  10. rip says:

    @Zack: Agree. Increased commodity speculation is going to grow as an issue starving people unnecessarily. Let’s hear it for commodity globalization. You want rice? Pay our price.

    @Vilgrad: Agree. Still trust shadowstat more.

    While inflation is not at runaway levels, it is still well above the gov’s manipulated rate.

    Given the profit margin pressure building due to commodity spikes do not be surprised to see a surprise inflation jump soon.

    The charts shown in this posting are simply another example of fed selective cherry picking self-serving stats.

    Why not just go back to the CPI we used quite successfully for decades?

  11. MayorQuimby says:


    This is the most important thing everyone needs to know:

    “…an inflation rate that is below what Chairman Bernanke has referred to as “the mandate-consistent inflation rate” of “about 2 percent or a bit below” than we would if average prices were hewing pretty close to the target path. As I have previously noted, over the past 15 years or so, the Federal Open Market Committee (FOMC) has delivered an average inflation rate, measured as growth in the PCE price index, that is wholly consistent with this mandate. ”



    “Section 2a. Monetary Policy Objectives
    The Board of Governors of the Federal Reserve System and the Federal Open Market Committee shall maintain long run growth of the monetary and credit aggregates commensurate with the economy’s long run potential to increase production, so as to promote effectively the goals of maximum employment, STABLE PRICES, and moderate long-term interest rates.”




  12. eightzeroone says:

    machinehead: “Chart 6 — presenting the lovely illusion of a carefully calibrated CPI expansion — is notable for what it omits: an epic stock market Bubble from 1995-2000, followed by a 50% smash; an epic real estate Bubble from 2002-2006, followed by a 50% smash in some areas (e.g. Las Vegas); a second 50%-plus stock smash (2007-2009); and a better than fivefold increase in the price of gold (2001-2010).”

    So what? The Fed says it’s mandate is to keep inflation stable, and Chart 6 is a graph that measures inflation (using CPI). That’s pretty simple. What would use instead of CPI?

    The implication of your argument is that the fed should start caring about volatile assets. That seems like a radical leap to me. The Fed shouldn’t try to target specific asset bubbles or worry about the price of gold – that’s not the Fed’s job. Bubbles happen in market economies, and the price of gold or the common stock of Morgan Stanley is not hugely important to the average American. The fed is concerned about the change in the price level of consumer goods and services purchased by households over time, and that’s what CPI measures.

  13. Transor Z says:


    Your comment is sound — as far as rote recitations of Fed publicly stated policy c. 2002 go. Although the tone of some of the critiques above may strike you as flippant, I would encourage you to look more closely at CPI and how it has been calculated historically. Were CPI calculation a constant during the period charted by Mr. Altig, that would be one thing. But Msrs. Boskin and Greenspan took CPI in a different direction beginning in the 1990s. John Williams at Shadowstats (http://www.shadowstats.com/) has covered this topic extensively for some time now and far more expertly than I ever could.

  14. eightzeroone says:

    @ Transor Z

    The market basket used to calculate CPI should change over time, since the consumer goods and services purchased by households change. A CPI calculation from 1995 might not have the cost of an internet service provider in the basket, but in 2010 that seems like a pretty common household expense. If you could come right out and say what is wrong with the market basket, that would be helpful.

    You’re probably right to be skeptical of a single statistic that is – by design – adjusted constantly to measure the prices of different goods. But even so, the point of the article above was to demonstrate that in the short term, disinflation seems real even if you use other statistics to measure prices. In the long run, high levels of inflation seem like a very real possibility to me, but what do I know? I’m going to wait and see, just like everybody else.

  15. carleric says:

    First we get commentary from Invictus attacking Palin for daring to suggest that there is food inflation when Benny doesn’t think so…now an article from a Fed head rationalizing their approach to defining inflation and peeing in his pant over a perception of deflation….c’mon Barry….you wouldn’t have an agenda here would you? Next an article on the strong US dollar?

  16. resuscitate says:

    This guy sold his soul to Wall Street. Read his blogs (macroblog, I believe) prior to the financial collapse. He was Greenspan’s policy defender and somewhat of a right-leaning market fundamentalist. He and Mishkin serve the same master. Read but verify the facts and source.

  17. Take:

    Toxic Sludge is Good For You: Lies, Damn Lies and the Public Relations Industry by John Stauber Paperback $12.21

    Trust Us We’re Experts: How Industry Manipulates Science and Gambles with Your Future by Sheldon Rampton Paperback $10.35

    Propaganda by Edward Bernays Paperback $9.42


    you know, an Rx: ‘for the Antidote’

  18. RW says:

    With the exception of a few excitable or paranoid souls, some excellent analysis in the comments today. My own (admittedly rather feeble) take is we’ve been in a largely central bank supported pushmi-pullyu economic scenario for a couple decades now as the “Great Moderation” (hah!) attempted to thread between deflation ahd inflation. The problem of asset bubbles will continue to bedevil inflation/deflation analysis (increased cost of inputs such as materials offsetting stagnant wages for eg) until the final test which will IMVHO be, paraphrasing George Orwell, on the battlefield of government policy and global exchange rates.

    Either serious “belt-tightening” and/or protectionism/trade-war gives deflationary forces the advantage in this case I think.