Posts filed under “Inflation”

Inflation Expectations Stay Steady as the CPI Edges Up

Inflation Expectations Stay Steady as the CPI Edges Up
William Bednar and Mehmet Pasaogullari

After hovering in a narrow range between 1.0 percent and 1.6 percent for eight months straight, annual inflation as measured by the Consumer Price Index (CPI) increased to 2.0 percent in April. Part of the uptick is explained by food prices, which have increased more in the past three months than has been typical over the past few years. In April, for example, the food component of the CPI increased at a seasonally-adjusted annualized rate of 4.5 percent, and over the past three months it has averaged increases of 4.8 percent.

However, underlying inflation measures have also increased slightly, which suggests that something more than rising food prices may be at work. Annual inflation based on the core CPI, which excludes food and energy prices, has increased from 1.6 percent to 1.8 percent since the beginning of the year. Inflation based on the median CPI increased from 2.0 percent to 2.2 percent over that same time period, and inflation as measured by the trimmed-mean CPI increased from 1.6 percent to 1.8 percent.

Though these measures have risen modestly, measures of inflation expectations suggest that the increases do not signal a persistently higher rate of inflation.

Near-term inflation expectations as measured by the University of Michigan’s Survey of Consumer Sentiment (UM survey) and the Survey of Professional Forecasters (SPF) have not changed appreciably in the past few months. Although UM survey respondents increased their estimate of inflation over the next 12 months slightly between November 2013 and February of this year (from 2.9 percent to 3.2 percent), since February the median expected price change over the next twelve months has stayed at 3.2 percent. Likewise, the inflation rate expected over the next year by SPF participants has also been relatively stable, remaining in a range between 1.8 percent and 2.0 percent since the beginning of 2013. Most recently, it was 2.0 percent (2014:Q2).

Additional detail from the SPF provides information on how participants in this survey broadly see the risk to inflation in the near term. The SPF asks respondents to assign probabilities to particular ranges of expected year-over-year core CPI inflation for the fourth quarters of the current year and the following year. A high probability in one or two particular ranges suggests a bit more certainty for the inflation outlook, while a more balanced set of probabilities on the various ranges suggests less certainty. In the second quarter, survey respondents saw a 44.1 percent probability of year-over-year inflation being between 1.5 percent and 2.0 percent in the fourth quarter of 2014. They see over a 70 percent chance of inflation being between 1.5 percent and 2.5 percent in that same quarter. For the fourth quarter of 2015, most participants again believe that inflation will be between 1.5 percent and 2.5 percent. However, they assign similar probabilities to two ranges, the 1.5–2.0 percent range (32.7 percent) and the 2.0–2.5 percent range (31.9 percent).

Longer-term inflation expectations have been relatively consistent also. Before ticking down to 2.8 percent in May, the median expectation for price changes over the next 5 to 10 years from the UM survey had been at 2.9 percent since the beginning of 2014. Similarly, from the SPF, expected average annual inflation over the next 5 years has been around 2.1 percent since mid-2013, while over the next 10 years it has been between 2.2 percent and 2.3 percent since the fourth quarter of 2012.

Market-based measures of inflation expectations give a general sense of how investors view the prospects for future inflation. Two such measures are break-even inflation rates and inflation swap rates. Similar to the survey based measures, these indicators have been rather stable over the recent past as well. The 10-year break-even inflation rate has remained between 2.1 percent and 2.3 percent since the beginning of 2014, and the 10-year inflation swap rate has been between 2.4 percent and 2.6 percent. As recently as the May 19, 2014, the 10-year break-even inflation rate was at 2.2 percent and the 10-year inflation swap rate was at 2.5 percent.

These various measures suggest that over the recent past, inflation expectations have remained well anchored. Both survey- and market-based measures have held steady in relatively narrow ranges for some time. Additionally, the probabilities provided by the SPF show that in addition to the average expectation for inflation being stable over time, there is also some degree of certainty over the expected range that core inflation might fall in, at least for the next few years.

Source: Federal Reserve Bank of Cleveland

Category: Inflation, Think Tank

Category: Federal Reserve, Inflation, Think Tank

Category: Federal Reserve, Inflation, Think Tank

Central Bank Transparency Anchors Inflation Expectations

Category: Inflation, Think Tank

Category: Economy, Inflation, Think Tank

Why Has Core Inflation Slowed?

Source: Bloomberg Visual Data From Bloomberg Visual Data: A weakening in price growth over the past two years can largely be blamed on muted costs for health care, cars, clothing and financial services. Core PCE inflation running at 1.09 percent owes much of its small climb to housing-related prices. The rise in those costs, including…Read More

Category: Digital Media, Inflation

Real Price of Gold Since 1791

click for ginormous graphic Source: Visualizing Economics   Earlier this year, we discussed the Lessons Learned from the Fall of Gold. That surprisingly generated some controversy despite the near 40% collapse from its 2011 peak.   Rather than spill a lot of ink onto the page, I wanted to direct your attention to the following…Read More

Category: Digital Media, Gold & Precious Metals, Inflation

The Fed and Hyperinflation

“It is after a trend has been reversed that the full effect of the preceding excesses is felt.” -George Soros For the last 5+ years we have seen a massive attempt by global central banks to prop up asset prices. The Federal Reserve has spearheaded the effort, increasing their balance sheet from less than $1…Read More

Category: Economy, Federal Reserve, Inflation, Markets

Expectations Stay Anchored in Spite of Declining Inflation

Expectations Stay Anchored in Spite of Declining Inflation Charles T. Carlstrom and Margaret Jacobson The Federal Open Market Committee (FOMC) has stated that its long-run target for inflation is 2 percent. Inflation does and will always vary around that target, but some observers are worried that the recent decline we have seen in inflation is…Read More

Category: Federal Reserve, Inflation, Think Tank

Why Do Measures of Inflation Disagree?

Why Do Measures of Inflation Disagree? Yifan Cao and Adam Hale Shapiro FRBSF Economic Letter December 9, 2013     Inflation as measured by the personal consumption expenditures price index is near historical low levels, below the Federal Reserve’s 2% longer-run goal. Another common inflation measure, the consumer price index, is also historically low, but…Read More

Category: Inflation, Think Tank