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December 22, 2010
An inflation (or lack thereof) chart show
Over at TheMoneyIllusion, Scott Sumner takes a shot at what he refers to as "Disinflation Denial." His point is that prior to the recent run-up, "commodity price indices fell by more than 50%." Thus, if the run-up in commodity prices suggests loose policy now, they must have been signaling tight policy earlier.
I am hesitant to endorse the view that any subset of prices gives us a clear view of inflation trends. What I do endorse in the Sumner piece is the advice that "the Fed look at a wide range of indicators." I can tell you that is exactly what we do at the Atlanta Reserve Bank and, as just one example within the Fed System, in this post I'll review the battery of indicators that we are currently looking at here. Most of these will be no surprise, but I find it useful to occasionally see them in one place. So here we go. (Note that throughout this blog post I will focus most of my comments on the consumer price index [CPI], but most of what I say also applies to the personal consumption expenditure [PCE] price index as well.)
First up, of course, are the so-called (and often maligned) core measures of inflation. I am completely sympathetic to the view that the traditional core index, which subtracts out food and energy components, is a somewhat arbitrary cut of the price statistics. For that reason, Ipersonally tend to lean more heavily on median and trimmed-mean measures.
In Atlanta, we have been monitoring a newer core inflation measure, called the "sticky-price CPI," jointly developed by Mike Bryan and Brent Meyer (of the Atlanta and Cleveland Feds, respectively). As described by Bryan and Meyer:
"Some of the items that make up the Consumer Price Index change prices frequently, while others are slow to change… sticky prices [those that are slow to change] appear to incorporate expectations about future inflation to a greater degree than prices that change on a frequent basis… our sticky-price measure seems to contain a component of inflation expectations, and that component may be useful when trying to gauge where inflation is heading."
Like the other core measure, the sticky-price CPI shows a pronounced downward movement over the past several years, with some sign of (an ever-so-slight) recovery as of late.
Though I disagree with the assertion that core measures are a convenient way to ignore unpleasant movements in the overall CPI—there is evidence that core measures are useful in predicting where total CPI inflation is heading—it is almost surely a bad idea to ignore what is happening to headline statistics. (After all, in the end it is the average of all prices with which we are concerned.)
Here too, the evidence suggests, at the very least, there is scant evidence that disinflation has left the scene:
I find it useful to take at least two more cuts at the overall price data. One, which has a decidedly short-term focus, involves examining the distribution of price changes in the broad categories that make up the headline CPI. Though a popular criticism of Fed policy—discussed and critiqued at Econbrowser—tries to deflate deflation concerns by reciting a number of prices that are rising, it is obvious that one could just as easily tick off a reasonably large list of prices that are falling:
(The individual colors in the chart represent different components of the CPI. The underlying data can be found from this link to the explanation of the median CPI.)
The graph of the November price change distribution is actually somewhat encouraging. What it tells us is that almost half of the price changes in the CPI market basket, weighted by their shares of total consumer expenditures, fell in the (annualized) range of 0 percent to 2 percent. Furthermore, about as many price changes were below this range as they were above it.
A closer look at the prices that fall in the 0 percent to 2 percent category, however, reveals that individual price changes are skewed to the downside of the range:
On a month-to-month basis, the distribution of individual prices does shift around, so these statistics are nothing more than suggestive short-run snapshots (but I believe they are informative nonetheless).
At the other end of the temporal scale is a look at how inflation has behaved over time. If the central bank had a long history of missing its stated inflation objectives, we might feel very different about an inflation rate that is below what Chairman Bernanke has referred to as "the mandate-consistent inflation rate" of "about 2 percent or a bit below" than we would if average prices were hewing pretty close to the target path. As I have previously noted, over the past 15 years or so, the Federal Open Market Committee (FOMC) has delivered an average inflation rate, measured as growth in the PCE price index, that is wholly consistent with this mandate. Here's the case in a graph, adjusting the mandate-consistent inflation rate to account for an assumed upward bias in the CPI relative to the PCE index:
Actually, those short-run complications are mostly associated with falling expectations of inflation. In my last macroblog post, I argued that the stabilization of market-based CPI inflation expectations and the associated decline in the perceived probability of deflation should arguably be counted as a success of the Fed's current policy stance. The latest on market-based expectations was included in our previous macroblog item. For completeness, survey-based expected long-term inflation remains somewhat below the levels prior to the onset of the recession:
I believe this is basically the bottom line: whether we look at headline inflation (straight-up, component-by-component, or in terms of the long-run trend), core inflation measures (of virtually any sensible variety), or inflation expectations (survey or market based), there is little a hint of building inflationary pressure.
While I don't dismiss the usefulness of looking at other indicators (stock prices, bond prices, foreign exchange rates, commodity prices, and real estate prices are on Scott Sumner's list; I would add various measures of labor costs to mine), you have to be pretty selective in your attentions to build the contrary case.
But feel free. We'll keep watching.
By Dave Altig
Senior vice president and research director at the Atlanta Fed
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December 17, 2010
What's behind the recent rise in Treasury yields?
David Beckworth, who blogs at Macro and Other Market Musings, posted a comment regarding macroblog's post "What might monetary policy success look like?" from December 2. Beckworth's comment specifically mentioned this chart…
… as part of this question:
"How did you create the latter figure [shown above]? Using the Fed's own constant maturities series (for both the nominal and real yield), the figure I come up with is less impressive. It shows a turnaround in inflation expectations about the time QE2 is promoted by Fed officials, but then inflation expectations stall and remain far from the 'mandate-consistent inflation rate.'
"Here is a post where I placed one such graph."
And here's the graph of expected inflation from Beckworth's post:
The series shown in the Beckworth chart has a different economic meaning than the chart shown in the original macroblog post (as was suggested by another commentator to our earlier post).
The chart Beckworth shows in his referenced blog post is the five-year Treasury Inflation-Protected Securities (TIPS) spread (the difference in nominal and real Treasury yields at five-year maturities). And so when he states, "This figure shows average annual expected inflation over the next five years has been flatlining around 1.55% over most of November" it means just that: it's examining the next five-year period (2010–15). I've reposted below an updated version of this chart, along with the 10-year TIPS spread. Since Beckworth's comment on macroblog, the five-year TIPS spread has widened about 13 basis points, depending on the measure you're using.
The chart used in the December 2 macroblog post is a different measure altogether. It's the five-year/five-year forward break-even inflation rate—not the TIPS spread. This chart shows a measure of expected inflation in the five-year period beginning five years from now. So this chart shows what investors expect to be the cumulative change in the consumer price index beginning in November 2015 through November 2020. Put another way, it's the realized inflation that would provide an equivalent return to both the nominal Treasury securities and the real TIPS securities. An updated picture is provided below.
Thus we're talking about apples and oranges in two respects: (1) these two charts cover different periods (2010–15 versus 2015–20); and (2) the two calculations themselves are different (taking a simple nominal-real spread versus the 5-year/5-year forward calculation).
Now what's the point of all of this, besides highlighting the minutiae of measuring inflation expectations? Resurrecting Beckworth's question and answering it help illuminate the recent concern about increases in Treasury yields. Indeed, since the November Federal Open Market Committee (FOMC) meeting, longer-dated yields have risen considerably, with the 10-year bond's yield up 86 basis points, for example. But the recent movements in nominal and real yields can be placed in two categories: (A) from when the Federal Reserve began signaling consideration of further asset purchases (late August) to the November FOMC meeting, and (B) the post-November FOMC meeting period. In period A, nominal yields were relatively flat while real yields declined somewhat, indicating a healthy rise in inflation expectations from the lows seen this summer (this change is shown by the increase in the TIPS spreads and breakeven inflation rates during the period). In period B, the rise in nominal yields has been primarily driven by a rise in real yields (not unanchored inflation expectations).
As Martin Wolf wrote in Tuesday's Financial Times on this issue, "To understand what is going on, we need to distinguish the role of shifts in real interest rates from that of shifts in inflation expectations." As is evident in the charts, and in one of Beckworth's most recent posts, real rates have risen alongside nominal rates—a sign that inflation expectations are now relatively stable.
By Andrew Flowers, senior economic research analyst in the Atlanta Fed's research department
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December 08, 2010
Questions (and some potential answers) on immigration and remittances
Immigration is a topic that raises many questions from both policymakers and the public, and researchers work to offer perspective. Some questions currently being posed are
- Does immigration into the United States have a positive impact on native-born employment opportunities?
- If remittance fees (that is, fees immigrants pay to send money home) are reduced, how much more money do migrants send home?
- How does sponsorship of family members' immigration into the United States change immigration patterns?
Unskilled immigrant labor and offshoring
Some highlights from the research presented at the conference include a paper by University of California, Davis professor Giovanni Peri that was recently profiled in the New York Times. Peri argues that unskilled immigrant labor helps prevent U.S. firms from relocating offshore.
The paper cites evidence indicating that less-educated immigrants are employed in jobs that require more manual and routine-intensive tasks and on average do not compete for jobs in which the bulk of native workers are employed. Those jobs tend to be more cognitive and nonroutine-intensive type of work. In other words, immigrants and low-skilled native workers are not substitutes but complements. In fact, unskilled immigrants compete more with offshore workers. The paper concludes that immigration generates cost-savings for U.S. firms and thus a corresponding increase in productivity, so immigration's aggregate effect on the level of low-skilled native employment in the United States is positive.
This finding is in contrast to research conducted by George Borjas of Harvard University, who also participated in the conference. His work suggests that rather than being complements, immigrants with similar skill levels tend to be substitutes for native workers.
In 2008, immigrants sent $336 billion to their relatives in developing countries, and in many countries remittances are often greater than private capital flows and official development aid combined. Remittance flows also generate billions of dollars in fees.
Dean Yang, from the University of Michigan, quantifies the impact of money transfer fees on remittances flows. Using a unique field experiment among Salvadoran migrants in the Washington, D.C., area, migrants were randomly assigned discounts on remittance transactions fees. Surprisingly, minor reductions in remittance fees led to large increases in total transfers. For instance, a $1 reduction in transaction costs generated $25 more remitted dollars per person per month. This finding suggests that a reduction in transaction costs can lead to very sizable gains in recipient countries.
Sponsorship of family members
Although countries such as Canada and Australia prioritize the entry of young, skilled foreign workers, the U.S. immigration system strongly emphasizes family reunification, which is a method where naturalized immigrants can sponsor relatives (spouse, children, parents, and siblings) in their immigration to the United States. Sponsoring new immigrants means that migrants not only are a major source of remittances, but they can fundamentally shape the flow of immigration by assisting migration of their relatives.
Until now, researchers had limited data on sponsors' behavior. Using a new immigration survey, Yale University professor Mark Rosenzweig presented research that for the first time explores the role of sponsorship. He shared preliminary results showing that while immigrant children who are less educated tend to receive remittances from their relatives who have immigrated to the United States, children with more schooling are able to take better advantage of the U.S. job market and are the first ones to be sponsored.
Other papers included research aimed at quantifying the effect of female migration on children left behind, the impact of immigrants on the educational attainment on natives, the productivity gains from skilled migration into the United States, and the role of seasonal migration in mitigating famine in Bangladesh. All of the conference papers are available.
By Stephen Kay, senior economist and coordinator of the Atlanta Fed's Americas Center, and Federico Mandelman, research economist and assistant policy adviser, both of the Atlanta Fed's research department
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December 02, 2010
What might monetary policy success look like?
As 2010 nears its end, my colleagues and I are beginning the process, familiar to organizations public and private, of evaluating performance in the past year and setting goals for the year ahead. In that process, one question is pressed: What does success look like?
It is a good question for monetary policy, and one I touched on a couple of posts back. As in that post, I'll cite my boss, Atlanta Fed President Dennis Lockhart from his Nov. 16 speech in Montgomery, Ala.:
"In my mind, the perceived risks—particularly the risk of overshooting inflation—must be weighed against the risks that could be associated with a policy of inaction. Chief among those risks is a recessionary relapse possibly tipping into a long spell of deflation. Through the summer there were some signs of renewed disinflation, which could lead to deflationary expectations taking hold.
"I think it is important to stress that our experience in dealing with inflation versus deflation is not symmetric. In the event of a policy overshoot, inflation containment requires the implementation of the mostly familiar strategy of raising short-term interest rates. In the event of an undershoot, however, dealing with a deflationary spiral and the attendant real consequences would be far less familiar territory for policymakers."
So, in President Lockhart's view, there is the statement of objective—insurance against an unwanted deflationary spiral. And the measure of success? Again from President Lockhart, as quoted in my previous post:
"In regard to price stability, this policy has already shown some signs of success by altering inflation expectations and reducing the risk of unwanted disinflation. To explain, inflation expectations extracted from Treasury inflation-protected securities, or TIPS, spreads over like-duration Treasury securities were declining persistently over the course of late spring through summer.
"Following the August 27 Jackson Hole speech by Fed Chairman Ben Bernanke, these spreads have recovered to previous levels. In addition, according to analysis we've done at the Atlanta Fed, deflation probabilities reflected in TIPS have fallen from the high levels prior to the September FOMC meeting."
Those deflation probabilities were described in an earlier macroblog post, and if you are looking for a measure of success, here is a picture:
As of today's update, these probabilities have fallen to the levels observed prior to the economy's summer soft patch. Importantly, the deflation probabilities have retreated without a movement of straight inflation expectations outside of bounds that are (arguably) consistent with what Chairman Bernanke has described as "the mandate-consistent inflation rate."
Of course, the full story has yet to be written. But it looks like a promising start to me.
Note: The deflation probabilities mentioned in the blog are published weekly as part of the Atlanta Fed's Inflation Project. For a description of inflation expectations, measured as the breakeven rates calculated from TIPS yields, see this article from the Federal Reserve Bank of San Francisco.
By Dave Altig, senior vice president and research director at the Atlanta Fed
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