Posts filed under “Inflation”
Commodity Prices and Inflation: The Perspective of Firms
Mike Bryan, Brent Meyer and Nicholas Parker
July 16, 2013
We’ve been thinking a lot about commodity prices lately. In case you haven’t noticed, they’ve been falling. And with inflation already tracking well under the Federal Open Market Committee’s (FOMC) longer-term objective of 2 percent, it’s reasonable to wonder whether the modest downward tilt in commodity prices is likely to put even more, presumably unwanted, disinflation into the pipeline.
We take some comfort from research by Chicago Fed President Charles Evans and coauthor Jonas Fisher, vice president and macroeconomist, also of the Chicago Fed. They conducted a statistical analysis of commodity prices and core inflation and found no meaningful relationship between the two in the post-Volcker era of the Fed. According to the authors,
[I]f commodity and energy prices were to lead to a general expectation of a broader increase in inflation, more substantial policy rate increases would be justified. But assuming there is a generally high degree of central-bank credibility, there is no reason for such expectations to develop—in fact, in the post-Volcker period, there have been no signs that they typically do.
We took this bit of good news to our boss here at the Atlanta Fed, Dennis Lockhart, who hit us with a question we wish we had thought to ask. To paraphrase: Is the response of inflation different for commodity price increases compared to commodity price decreases? The idea here is that, for a time at least, firms will pass commodity price increases on to their customers but simply enjoy higher margins when commodity prices decline.
So we reached out to our business inflation expectations (BIE) survey panel and put the question to them. Full results of July’s business inflation expectations survey will be posted on our website tomorrow (July 17). Of the 209 firms who responded to the survey in July, half were asked how they would likely respond to an unexpected 10 percent increase in the costs of raw materials, and the other half were asked how they would likely respond to an unexpected 10 percent decrease. What we learned was that the boss was on to something.
For the half of the panel given the raw materials cost increase, about 52 percent indicated they would mostly push the materials costs on to their customers in the form of higher prices, compared to only 18 percent who indicated they would decrease their margins. But of the half of our sample that was given a decline in raw materials costs, 43 percent indicated they would mostly take their good fortune in the form of better margins and only 25 percent indicated that the drop in raw materials costs would induce them to drop their prices.
Of course, what a firm thinks it will do and what the marketplace will allow are not necessarily the same. But this got us thinking back to the earlier work at the Chicago Fed. Does this sort of “asymmetric” response to commodity prices appear in the data?
Following (roughly) the procedure that Evans and Fisher used, we computed the influence of a positive “shock” of one standard deviation (about 5 percent) to commodity prices on core inflation. (Our sample runs from 1954 to 2013.) As did Evans and Fisher, we confirmed that commodity price increases had a significant positive influence on core inflation, spread out over a period of several years. But we were surprised to see that when businesses were hit with a similar-sized decrease in commodities prices, the opposite didn’t occur. Commodity price declines did not produce any downward pressure on core inflation.
As in Evans and Fisher, focusing in on just the post-Volcker era (from 1982 forward), we found that the influence of positive commodity price increases on core inflation was significantly diminished (although it appears to be just a little stronger than what they had reported). However, the influence of commodity price decreases on core inflation remained the same—nada.
For many of you, this result probably doesn’t strike you as pathbreaking. There are many macroeconomic models where prices are “sticky” going down but pretty flexible on the way up. But if the question is whether we think the recent slide in commodity prices is likely to put added downward pressure on core inflation, we’re likely to echo Evans and Fisher with a bit more emphasis: the decline in commodity prices isn’t likely to have an influence on core inflation unless it leads to a general expectation of a broader disinflation. And there is no evidence in the data that suggests this is likely—post-Volcker era or not.
By Mike Bryan, vice president and senior economist,
Brent Meyer, economist, and
Nicholas Parker, senior economic research analyst, all in the Atlanta Fed’s research department
This is brilliant: The Federal Reserve is awaiting That prices may start re-inflating, So they can foresee Unwinding QE, Whose tapering they’ve been debating. The Fed will not bother to taper Its purchase of Treasury paper ‘Til the jobless rate now And inflation allow An end to their stimulus caper. Bernanke must act with agility…Read More
Really traders!?! Did you really believe that the Fed was never going to stop buying bonds? Really?!?
Do you think that the Fed was going to have an infinite accommodation, and that rates were going to stay at zero forever? Is that what you expected from the Central bank. C’mon, Really!?
And what about the dreaded hyper-inflation you have been warning us about for so long? Inflation has been so low for so long that it had its name legally changed to Deflation. Really!
Source: Trading Economics
Where you out the day Bernanke said he was targeting Unemployment, which has fallen from nearly 11% to 7.6%? Did you forget about that? Really!?!
And this entire Risk On rally — did you really think it was going to last forever? Really? US Equity are up nearly 150% over the past 5 years, didn’t you think it had to eventually slow down? Did you actually believe Markets were a uni-directional bet? Really?!?
The Fed has a dual mandate — stable prices and maximum employment. Did you really think there was a third component of maximizing your risk free equity returns? Really!?
This has been Really!?! With Ben & Janet.
U.S. core consumer price index’s increase since the latest recession ended in June 2009 Click to enlarge Source: Bloomberg The amount of inflation since the end of the recession in June 2009 is the smallest for any multiyear recovery since the 1970s. The gauge of prices excluding food and energy rose 6.3% through April….Read More
Drilling Down into Core Inflation: Goods versus Services M. Henry Linder, Richard Peach, and Robert Rich Liberty Street Economics, June 05, 2013 Among the measures of core inflation used to monitor the inflation outlook, the series excluding food and energy prices is probably the best known and most closely followed by policymakers and the…Read More
Source: Bloomberg’s Chart of the Day, Federal Housing Finance Agency Here is something I never would have guessed at, via Dave Wilson of Bloomberg: If you want to be hedged against the risk of a pickup in inflation, you would be better off buying houses than gold. That’s according to Michael Hartnett, chief…Read More
Japanese Inflation Expectations, Revisited
Benjamin R. Mandel and Geoffrey Barnes
Liberty Street Economics April 22, 2013
An important measure of success for monetary policy is a central bank’s ability to anchor inflation expectations; inflation expectations influence actual inflation and, hence, the achievement of a given inflation goal. This notion has special significance for Japan, where CPI inflation has been intermittently negative since 1994 and where it is widely believed that expectationsof future inflation have been persistently negative (that is, ongoing deflation is expected). In this post, we describe and evaluate an alternative, market-based measure of Japanese inflation expectations based on international price parity conditions. We find that recent inflation expectations have attained a level substantially higher than their previous peaks over the past three years.
By way of background, recent policy action by the Bank of Japan has shone a spotlight on Japanese inflation expectations. On April 4, the Bank announced a program called Quantitative and Qualitative Monetary Easing (QQE), which was a pledge to drastically ramp up asset purchases to increase the monetary base, and to extend the duration of assets held on the Bank’s balance sheet. Since nominal yields on Japanese government bonds have been quite low for some time, a preferred indicator of QQE’s success would be a decline in real interest rates as inflation expectations move closer to the Bank’s recently announced 2 percent price stability target.
How does one go about measuring Japanese inflation expectations? The consensus on this topic is that there is no single reliable measure. A commonly used market-based gauge of U.S. inflation expectations is the difference in yield between nominal and Treasury inflation-protected securities (TIPS)—the breakeven inflation rate. Analogous measures come from over-the-counter derivatives called inflation swaps. In Japan, the market for inflation-protected government bonds, called JGBi’s, is very thinly traded and a majority of the issuance has been bought back by the Ministry of Finance in recent years. These factors have cast doubt on the ability of JGBi prices to convey reliable information about inflation expectations. Swaps suffer from similar liquidity issues.
Alternative extant measures of inflation expectations are available from surveys of households, investors, and professional forecasters. However, survey responses may by formed in a backward-looking manner, making them more responsive to actual inflation than predictive of the future. The range of views offered by market‑ and survey-based measures is illustrated in the chart below. While measures of five- and ten-year expectations have converged somewhere around 1 percent in recent months, in the past analysts would have little confidence of even getting the correct sign of expected inflation by looking at any given measure.