Magazine article Economic Trends

Short-And Long-Term Inflation Expectations

Magazine article Economic Trends

Short-And Long-Term Inflation Expectations

Article excerpt


Consumer prices are rising slowly according to the latest data, although the disinflationary pressure seen in the spring has abated. Annual inflation was 1.5 percent in August 2013 as measured by the CP! and 1.8 percent as measured by the CP1 excluding food and energy (usually referred to as the "core CPI"). Underlying inflation measures, such as the median and trimmed-mcan CPI, have picked up, and the volatile energy component, coming in at -0.1 percent year-ovcr-year in August, drove CPI inflation lower than core CPI inflation.

To gauge where households, professional forecasters, and market participants expect inflation to be in the future, we look at recent survey and market-based measures of inflation expectations. These measures arc among the most successful predictors of future inflation.

The two surveys we use are the University of Michi gan's Survey of Consumer Attitudes and Behavior (UM survey) and the Philadelphia Fed's Survey of Professional Forecasters (SPF). The UM survey is monthly and the SPF is quarterly. The most recent UM survey was released in September, and the-most recent SPF was released in August for the third quarter of 2013. The UM Survey does not specif)- a particular basket for its questions on inflation expectations, whereas professional forecasters arc asked their opinions on the CPI and the core CPI. Note that we report the median responses. The market-based measures we'll look at arc the breakeven inflation rates calculated from TIPS and nominal Treasuries and inflation swap rates (find an update on inflation expectations based on the Cleveland Feds model here).

UM Survey participants expect CPI inflation to be 3.2 percent in one year, as of September 2013. The UM one-year-ahead expectation has been stable throughout 2013, compared to earlier periods. In contrast, SPF participants expect CPI inflation to be 1.86 percent in one year, as of August 2013.

The SPF one-year-ahead expectation has declined considerably since the last quarter of 2012; it was 2.19 percent in November 2012. SPF expectations for the core CPI have also been quite stable, ranging between 2.0 percent (February 2013) and 1.96 percent (August 2013). …

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