Accounting for term and liquidity premia can change the story.
Category Archives: inflation
“The Fed and the International Financial System”
Today, students in my Master’s level Public Affairs course in macroeconomics had the good fortune to receive a guest lecture from Steven Kamin, resident scholar at AEI, formerly Director of the International Finance Division of the Federal Reserve Board (sponsored by UW’s International Division). In his lecture, he covered the centrality of the dollar in the global financial system, monetary “spillovers” of Fed policy to other economies with special reference to the pandemic response, the macro challenges posed by the most recent fiscal relief package, and implications for emerging market economies. The entire lecture is here.
Company Price Change Announcements and Future Inflation
Goldman Sachs (Walker, “Company Pricing Announcements and the Inflation Outlook”) points out that changes company statements regarding price changes is contemporaneously correlated with PCE inflation, but not predictive. This puts in a different perspective media discussion of impending inflation.
The Market’s Expectations of Inflation and Real Rates over the Next Five Years
As of today, the five year constant maturity Treasury yield has stabilized for the last month at about 0.9%. The inflation breakeven implied by the spread between Treasurys and TIPS has plateaued at 2.52%. After accounting for the estimated term premium and liquidity premium, the implied inflation rate is 1.90% .
Some Strange Things about Inflation Expectations
I was interviewed for a Markeplace piece on some of the strange beliefs people have about how the government measures inflation.
One of the tangental points I mentioned to the reporter (it didn’t make into the article) is household inflation expectations are consistently upwardly biased (by about a percentage point). This is shown in the below graph with ex post inflation (black) against forecasted from Survey of Professional Forecasters (blue) and Michigan (red).
Inflation Expectations, Post-Passage of the American Rescue Plan
At the end of the week, the five year constant maturity Treasury yield continued to rise along with the implied expected inflation rate; but after accounting for the estimated term premium and liquidity premium (h/t Bob), the increase in the latter since the Georgia elections is much more modest.
The Price Level Shortfall
Had we run a 2% price level target since December 2007 (the beginning of the previous recession).
Are Market Expectations of Inflation Really Rising?
A typical market-based measure of expected inflation is the inflation breakeven calculated by subtracting the TIPS yield from Treasury yield at corresponding maturities. The breakeven spread is shown as the blue line in Figure 1.
Globalization and Inflation Risks
In a globalized American economy, are domestic determinants (e.g., US output gap) the only important factors?
Rising Expected Inflation … to about 2%
The Survey of Professional Forecasters (SPF) February release and the January five year breakeven inflation rate suggest accelerating inflation – up to about 2.1%-2.2%