Magazine article Economic Trends

Inflation Expectations Stay Steady as the CPI Edges Up

Magazine article Economic Trends

Inflation Expectations Stay Steady as the CPI Edges Up

Article excerpt


by Mehmet Pasaogullari and William Bednar

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. …

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