The Layers of Inflation Persistence
In a recent post, we introduced the Multivariate Core Trend (MCT), a measure of inflation persistence in the core sectors of the personal consumption expenditure (PCE) price index. With data up to February 2022, we used the MCT to interpret the nature of post-pandemic price spikes, arguing that inflation dynamics were dominated by a persistent component largely common across sectors, which we estimated at around 5 percent. Indeed, over the year, inflation proved to be persistent and broad based, and core PCE inflation is likely to end 2022 near 5 percent. So, what is the MCT telling us today? In this post, we extend our analysis to data through November 2022 and detect signs of a decline in the persistent component of inflation in recent data. We then dissect the layers of inflation persistence to fully understand that decline.
Highlights from the Fifth Bi‑annual Global Research Forum on International Macroeconomics and Finance
The COVID-19 pandemic, geopolitical tensions, and distinct economic conditions bring challenges to economies worldwide. These key themes provided a backdrop for the fifth bi-annual Global Research Forum on International Macroeconomics and Finance, organized by the European Central Bank (ECB), the Federal Reserve Board, and Federal Reserve Bank of New York in New York in November. The papers and discussions framed important issues related to the global economy and financial markets, and explored the implications of policies that central banks and other official sector bodies take to address geopolitical developments and conditions affecting growth, inflation, and financial stability. A distinguished panel of experts shared diverse perspectives on the drivers of and prospects for inflation from a global perspective. In this post, we discuss highlights of the conference. The event page includes links to videos for each session.
The New York Fed DSGE Model Forecast—December 2022
This post presents an update of the economic forecasts generated by the Federal Reserve Bank of New York’s dynamic stochastic general equilibrium (DSGE) model. We describe very briefly our forecast and its change since September 2022.
Federal Reserve System Conference on the Financial Stability Considerations for Monetary Policy
How does monetary policy affect financial vulnerabilities and, in turn, how does the state of the financial system interact with the maximum employment and price stability goals of monetary policy? These were the key questions covered in the September 30 conference organized by the Federal Reserve System. The conference was co-led by Federal Reserve Board Vice Chair Lael Brainard and Federal Reserve Bank of New York President and CEO John C. Williams, each of whom offered prepared remarks. The program also included a panel of current and former central bank policymakers to explore the themes of the conference, as well as paper presentations with discussants. In this post, we discuss highlights of the conference. The agenda includes links to all of the presentations as well as videos for each session.
New SCE Charts Include a Measure of Longer‑Term Inflation Expectations
Today, the New York Fed introduces several new data series and interactive charts depicting findings from its Survey of Consumer Expectations (SCE). The SCE is a representative, internet-based monthly survey of a rotating panel of about 1,300 household heads in the United States. Since January 2014, we have been reporting findings from our monthly survey on U.S. households’ views on inflation, household income and spending growth, their expectations about the housing and labor market, and a range of other expectations about the economy and outcomes for their own household. In addition to publishing interactive charts showing national trends as well as trends by demographic groups (such as age, income, education, numeracy, and geography), we also post the underlying microdata online (with a nine-month lag) to make it available for research purposes. We are adding three new data series to our interactive charts today. The first two concern expectations about future inflation, and the third concerns expectations of future home price growth.
Short‑Dated Term Premia and the Level of Inflation
Since the advent of derivatives trading on short-term interest rates in the 1980s, financial commentators have often interpreted market prices as directly reflecting the expected path of future interest rates. However, market prices generally embed risk premia (or “term premia” in reference to measures of risk premia over different horizons) reflecting the compensation required to bear the risk of the asset. When term premia are large in magnitude, derivatives prices may differ substantially from investor expectations of future rates. In this post, we assess whether term premia have increased with the recent rise in inflation, given the historically positive relationship between the two series, and what this means for the interpretation of derivatives prices.
The New York Fed DSGE Model Forecast—September 2022
This post presents an update of the economic forecasts generated by the Federal Reserve Bank of New York’s dynamic stochastic general equilibrium (DSGE) model. We describe very briefly our forecast and its change since June 2022.
How Much Did Supply Constraints Boost U.S. Inflation?
What factors are behind the recent inflation surge has been a huge topic of debate amongst academics and policymakers. We know that pandemic-related supply constraints such as labor shortages and supply chain bottlenecks have been key factors pushing inflation higher. These bottlenecks started with the pandemic (lockdowns, sick workers) and were made worse by the push arising from increased demand caused by very expansionary fiscal and monetary policy. Our analysis of the relative importance of supply-side versus demand-side factors finds 60 percent of U.S. inflation over the 2019-21 period was due to the jump in demand for goods while 40 percent owed to supply-side issues that magnified the impact of this higher demand.
Pass‑Through of Wages and Import Prices Has Increased in the Post‑COVID Period
Annual CPI inflation reached 9.1 percent in June 2022, the highest reading since November 1981. The broad-based nature of the recent inflation readings has increased concerns that inflation may run above the Federal Reserve’s target for a longer period than anticipated. In this post we use detailed industry-level data to examine two prominent cost-push-based explanations for high inflation: rising import prices and higher labor costs. We find that the pass-through of wages and input prices to the U.S. Producer Price Index has grown during the pandemic. Both the large changes in these costs and a higher pass-through into domestic prices have contributed toward higher inflation.
The Disconnect between Productivity and Profits in U.S. Oil and Gas Extraction
U.S. oil and gas production boomed during the years leading up to the pandemic. From 2011 to 2019, oil production more than doubled and dry natural gas production rose by more than half. Remarkably, these gains occurred despite lackluster investment spending and hiring. Instead, higher production came largely from productivity gains, via wider adoption of fracking technologies. More recently, production recovered sluggishly from the pandemic downturn despite a quick recovery in prices. Our analysis in this post suggests that slower productivity growth and investors’ demand for higher returns have made U.S. firms willing to boost output only at a higher threshold oil price.