Monday, July 19, 2010

The Cleveland Fed and Expected Inflation: It's Getting Worse

The Cleveland Fed has updated it expected inflation series.  Here is the lead paragraph from their July 16 update:
The Federal Reserve Bank of Cleveland reports that its latest estimate of 10-year expected inflation is 1.69 percent. In other words, the public currently expects the inflation rate to be less than 2 percent on average over the next decade.
Recall, that at the end of June the same paragraph read as follows:
The Federal Reserve Bank of Cleveland reports that its latest estimate of 10-year expected inflation is 1.84 percent. In other words, the public currently expects the inflation rate to be less than 2 percent on average over the next decade.
As I have said before, the way I interpret these numbers is that aggregate demand is expected to weaken in the future. Since the Fed can largely shape aggregate demand (i.e. total current dollar spending) if it wanted to do so this amounts to an expected tightening of monetary policy going forward. 

*One does have to be careful, though, since positive aggregate supply shocks could be pushing down inflation too. Given the current economic conditions it seems to me the negative aggregate demand shocks are the driving force. 

5 comments:

  1. If only they had an expected nominal income series...

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  2. I'm sorry,but to the Joe Average guy on the street like me, those numbers seem to be divorced from reality.

    So many things I spend money for aren't accounted for at all. For instance,do you expect college tuition at State U's here in Texas to stay within that 2 per cent ceiling?

    How about the price of a steak dinner?

    Today we have $2.50 gas in central Texas. You think that's going to stay under a 2 percent per annum ceiling?

    The Fed has cooked the books until they got the low, low demand-pull fairy tale they wanted. Trouble is, the rest of us are living in a cost-push world.

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  3. You should take a look at their shorter-term series - the situation is even worse.

    One-year inflation expectations are 0.95%, two-year expectations are 1.24%, and five-year expectations are 1.50%.

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  4. This pertains to one of your earlier posts on currency unions:
    http://www.connectmidmichigan.com/news/story.aspx?id=481793

    You can be proud of your home state!

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  5. These inflation expectations are forecasts of the CPI, not forecasts of inflation. Inflation is running at about 3% when you discount phony constructs like owner equivalent rent and questionable quality adjustments.

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