Inflation Expectations and Forecasts

Market expectations for inflation over next five years as of today:

Figure 1: Five year inflation breakeven calculated using 5 year Treasury minus 5 year TIPS yields (blue), five year expected inflation (red). Source: Treasury via FRED, Kim, Walsh and Wei (2019) following D’amico, Kim and Wei (DKW) accessed 3/10/2022, and author’s calculations.

Taken literally, average expected inflation over the next five years is coming down. Notice the gap between simple breakeven and premia adjusted spread (hence expected inflation) was 1.19 percentage points at end-February. If that gap were to hold (no reason it should) through today, then expected inflation would be 2.1%.

Here is survey based and hybrid estimated forecasts of inflation over the next year:

Figure 2: CPI inflation year-on-year (black), Cleveland Fed nowcast as of 4/1 (gray +), median expected from Survey of Professional Forecasters (blue +), median expected (preliminary) from Michigan Survey of Consumers (red), median from NY Fed Survey of Consumer Expectations (light green), forecast from Cleveland Fed (pink), mean from Coibion-Gorodnichenko firm expectations survey [light blue squares]. Source: BLS, University of Michigan via FRED and Investing.com, Reuters, Philadelphia Fed Survey of Professional Forecasters, NY Fed, Cleveland Fed and Coibion and Gorodnichenko. 

The current Cleveland Fed nowcast is for an increase in y/y inflation in March. Household measures (which have typically been upwardly biased before 2021) indicate elevated expected inflation through March. Still, the surveys indicate a deceleration in inflation relative to today’s levels.

 

43 thoughts on “Inflation Expectations and Forecasts”

  2. Macroduck

    As is widely known, President Biden has ordered the release of millions of barrels of oil from the Strategic Petroleum Reserve.

    In a related, but less widely reported decision, Quebec’s maple syrup producers have announced the release of 22 million kilograms of sticky joy from their reserve. It’s great to see everyone doing their part to fight inflation.

    Reminds me of the Great Maple Syrup Robbery back in 2012…

      1. Moses Herzog

        This comment is mine obviously. Breaking in a new Keyboard. Ironically this is the best keyboard I’ve had in years, but I think it had a temporary hiccup between the computer and recognizing the type of keyboard. Only cost me $11 when they quoted it at $15. Hope I love it this much a month from now cuz these keys suit my herky-jerky typing better. Don’t feel so flustered using it. I finally found one that’s “in-between” Apple’s midget keys and the overly tall 1980s style keys. Finally found my “and this porridge is just right” keyboard.

        1. Moses Herzog

          That stuff is expensive, I mean, if you were gonna rob something for resell.

          I like watching the snobs explain how they turn it into homebrew. I think “Kid Dynamite” blogger (Who Menzie may have met back when, and my understanding was entertained by) had some posts on that. Aside from Macroduck’s recommendation on the fruit alcohol, which I plan on trying, I am mostly too lazy for homebrew.

          1. AndrewG

            That counterfactual felt kind of forced, admit it. I bet your mouth was full of waffles when you said it too.

            Ugh, I’ve had it with “novel” beer. They’re not even that novel. They’re just dumb.

          1. Moses Herzog

            Let’s keep this maple syrup side hustle “on the lowdown”. At least one of my neighbors probably thinks I play music too loud when I’m drinking, and this morning my garbage bin went about 3/4ths down the block like a windsail in these 40 mph winds. Next I’ll blink my eyes and the cops will enter my house, see the hardcopy NYTs strewn across half the floor and my house will be condemned. Then I’ll be displaced and begging Steve Kopits to let me house-sit at his timeshare in Kearny New jersey.

  3. macroduck

    Pretty pictures of some of the fundamentals and the math driving the near-term inflation outlook –

    An inventory shortfall on the way to being resolved:

    https://fred.stlouisfed.org/graph/?g=NOeF

    The shift toward increased goods consumption relative to services consumption gradually being resolved:

    https://fred.stlouisfed.org/graph/?g=NOf5

    Here’s why the year-over-year rise in core inflation is going to cool off, starting in the April data:

    https://fred.stlouisfed.org/graph/?g=NOfl

    Here’s why the month-over-month price of gasoline will look really bad in March data, less so in April:

    https://fred.stlouisfed.org/graph/?g=NOfs

    Used vehicle prices looking softer as of mid-March:

    https://publish.manheim.com/content/dam/consulting/ManheimUsedVehicleValueIndex-WebTable.png

    USDA has this to say about food prices in 2022:

    In 2022, food-at-home prices are predicted to increase between 3.0 and 4.0 percent, and food-away-from-home prices are predicted to increase between 5.5 and 6.5 percent.

    https://www.ers.usda.gov/data-products/food-price-outlook/summary-findings/

    For what it’s worth Naked Capitalism carries gossip between a doctor and patient about the supply chain for food:

    (T)he retired CEO of one of our big Ag corps…told me in no uncertain terms to begin to do everything I could to prepare. All kinds of problems are brewing with the nation’s food supplies and supply chains and the real pain will not start until later this summer or fall – but it is going to be really ugly. He rates the likelihood to be somewhere between “epic and biblical”

    Now I’m part of the problem, spreading rumors that lead to hoarding.

  4. macroduck

    By the way, 10y/2y inverted on Friday, while 10y/3m of course did not. Even though job gains in Friday’s data were a bit below the median estimate, expectations for mid-year rate hike ticked higher. With the passage of time, three-month rates should pick up, bu there’s no saying tens won’t keep pace. Ten year/three month inversion is still a crystal ball kinda thing.

  5. macroduck

    The debate over the causes of recent inflation identify money supply, a tight labor market, supply disruptions, demand shifts (toward goods), corporate profiteerig and fiscal policy as culprits. Well, yeah, we can see that. But when it comes to choosing remedies, we need to ask ourselves a few of questions:

    How much of the blame falls to each factor?
    How do the factors interact?
    How do the benefits of each factor stack up against the costs?
    How persistent is each factor likely to be?
    How much influence do monetary and fiscal policy have over various factors?

    When it comes to the inflaonary effect of a tight labor market, PIIE has an estimate. If the NAIRU is 4% and inflation expectations are anchored at 2%, then the current unemployment rate would only account for a 1% increment of inflation. In other words, inflation at 3%.

    https://www.piie.com/blogs/realtime-economic-issues-watch/will-anchored-inflation-expectations-actually-anchor-inflation

    Dudley is missing the forest for the trees.

    1. T. Shaw

      Apparently, there are as many definitions of the causes of inflation as there are economists and Fed Chairmen.

      Anyhow, in the 1970’s Fed Chair Wm. McChesney Martin agreed on causes inflationary with Powell and Biden, “It wasn’t me!”

      Cue the Shaggy music video.

    2. AndrewG

      Great for the writer, and for Cruz, and bad for the rest of us. The right wing lives off of the dumbest, most extreme left-wing sentiment.

  8. rsm

    Why not include error margins at least to soften the chartcrime down to misdemeanor levels, eh?

    With current ruble and nickel prices clearly not determined by supply and demand but arbitrary trader emotions, how can anyone maintain with a straight face anymore that prices are efficient and inflation reliably signals real scarcity?

    1. Barkley Rosser

      rsm,

      “chartcrime”? Oh, was it the lack of error margins in announcements that killed your brother?

      As for the ruble, “trader emotion” probably is a major player in setting the current Moscow street black market rate for the ruble of 200 per US dollar, but it is the central bank of Russia that is setting the official rate through some very strong and vigorous policies intervening in the markets.

  9. Bruce Hall

    Was going to take a break this weekend, but came across these two articles that seemed relevant:

    • The meaning and mechanics of “inflation shocks” — Measuring expected vs. actual inflation
    https://fredblog.stlouisfed.org/2022/03/page/2/ (Nice little slider at the bottom of the graph to expand historical perspective)

    • American Consumers Are Starting to Hit Their Breaking Point
    https://www.bloombergquint.com/gadfly/wall-street-should-start-worrying-about-u-s-consumers

    1. pgl

      FRED blog is excellent. You of all people should spend a little time reading it as maybe just maybe you might one day get the very basics.

      Now that 2nd link is a really, really dumb piece of writing – just you style. I did like this line – ‘The line from the bulls has been to watch what consumers do, not what they say.’

      Exactly why fretting on some Michigan survey on things like sentiment is a total waste of time.

      1. Bruce Hall

        Lucy, thanks for the backhanded compliment for my comment… I guess. But you just can’t resist the snide comment, can you?

        With regard to the Michigan Surveys of Consumers as a useful economic tool, you can either choose to use the data or not. If you believe the S&P 500 is a better indicator of what is happening, then go for it.
        http://www.sca.isr.umich.edu

        1. pgl

          Compliment? You are the most desperate fool I have ever since I watch Summer of 42 (1972 classic). I guess you take Brucie the Rape Artist to be equivalent to being a world class lover. Sorry dude but your precious Lucy is telling the DA you tried to rape him. If you go to prison for that – you will certainly have lots of lovers with big muscles.

        2. pgl

          “the S&P 500 is a better indicator of what is happening”

          Really? The stock market is the same as main street? The only morons who claim that are Trumpian fools or the selfish wonders who live in the Hamptons. Since I doubt the latter would ever let a lying moron in their circles, my vote is that you are a MAGA hat wearing moron.

          Keep it coming as it is quite the joy mocking the dumbest troll ever even if he is not getting that date with the boy named Lucy.

  10. ltr

    https://news.cgtn.com/news/2022-04-03/Chinese-mainland-records-1-506-new-confirmed-COVID-19-cases-18VhabYoPra/index.html

    April 3, 2022

    Chinese mainland reports 1,506 new COVID-19 cases

    The Chinese mainland recorded 1,506 new confirmed COVID-19 cases on Saturday, with 1,455 linked to local transmissions and 51 from overseas, according to data from the National Health Commission on Sunday.

    A total of 11,781 new asymptomatic cases were also recorded on Saturday, and 73,689 asymptomatic patients remain under medical observation.

    Confirmed cases on the Chinese mainland now total 154,738, with the death toll at 4,638.

    Chinese mainland new locally transmitted cases

    https://news.cgtn.com/news/2022-04-03/Chinese-mainland-records-1-506-new-confirmed-COVID-19-cases-18VhabYoPra/img/103c097df86b4d5985b60ec407637213/103c097df86b4d5985b60ec407637213.jpeg

    Chinese mainland new imported cases

    https://news.cgtn.com/news/2022-04-03/Chinese-mainland-records-1-506-new-confirmed-COVID-19-cases-18VhabYoPra/img/4531f2fbad9445f5ab40638da8103fc0/4531f2fbad9445f5ab40638da8103fc0.jpeg

    Chinese mainland new asymptomatic cases

    https://news.cgtn.com/news/2022-04-03/Chinese-mainland-records-1-506-new-confirmed-COVID-19-cases-18VhabYoPra/img/ff1c91dc877e404eb6e6adfa7aacd4cf/ff1c91dc877e404eb6e6adfa7aacd4cf.jpeg

    1. Barkley Rosser

      A “Turing point”? Oh, Steven, did the Russians take a Turing test and everybody decided that computers were more human than they were? 🙂

      1. AndrewG

        It’s horrible what the British government did to Turing. Of course if he were Russian, he would have been murdered by the government 20 years earlier.

        1. Barkley Rosser

          I agree, Andrew. Something that is not frequently talked about in the West is how much full-bore homophobia is a key part of Putin’s cooked up nationalist ideology, tied in with the Othodox Church. He has been ranting about the evils of “gender freedom” in the West recently. This is one among other reasons why nobody considering themselves to be progressive or “on the left” should be attempting to justify this invasion by Putin of Ukraine, although some still are. But then these are probably people who would have defended Stalin if they were around for his murders.

        1. Barkley Rosser

          Steven,

          It is an excellent movie. But it has a number of historical inaccuracies that I explained when it came out in some long posts on Econospeak but will not go on about. For me all that is a family matter, and I knew some of the people who appeared in it, although not the great man himself who died when I was young.

        2. AndrewG

          Cumberbatch’s performance was hugely overrated. Turing deserves a better biopic.

          I’ll check out Enigma, though. Strange that (according to Wikipedia) the movie doesn’t even mention Turing.

          1. Moses Herzog

            As far as I could tell the story of Imitation Game was obsessed with his sexuality. I’m a Democrat (some even might call me a bleeding heart liberal) but I get tired of the “virtue signaling”. If it fits in the story, plot, fine, no objection. But I don’t like being hit over the head with an Anvil with it. We “get it”, if Disney, FOX etc think that virtue signaling helps their profit margins, the CEOs are ready to put a rainbow bandana around their head at work, and then go home and use homophobic epithets every 5 minutes. We “got it” Hollywood. We “got it”, put away the phony anvil and try to write a DAMNED SCREENPLAY for once instead of “connect the dots for Karen”. And don’t tell me if Will Smith was white he wouldn’t have had his openly adulterous heinie thrown out of the Oscars. Not buying it, sorry.

          2. AndrewG

            @Moses

            “obsessed with his sexuality”

            That’s too important a part of the story. Turing was effectively murdered by his government for it. (He committed suicide after undergoing their utterly evil chemical pray-the-gay-away.)

          3. Moses Herzog

            I’m probably revealing my anti-Cumberbatch bias. Worst Sherlock Holmes ever. I’m a Jeremy Brett guy. I mean this is like Letterman and Leno, right?? If you watch Leno tell one wank joke, you’re a traitor in my book.

        3. pgl

          You are still bragging that your garbage has been featured by a pathetic rag like The American Thinker? Wow – you are stoooopid.

    2. pgl

      Turing or Turning? Are you so incompetent that you cannot copy the title of your own little easy?

      Oh well having read it I learned NOTHING. More The American Thinker quality intellectual garbage. And I had thought something entitled A Turning Point might tell us something useful. But then I saw who wrote it – and that told me why I had wasted 3 minutes of my life reading your worthless babble.

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