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The Atlanta Fed's macroblog provides commentary and analysis on economic topics including monetary policy, macroeconomic developments, inflation, labor economics, and financial issues.

Authors for macroblog are Dave Altig, John Robertson, and other Atlanta Fed economists and researchers.


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February 11, 2011


The inflation disconnect

Reuters's Brad Dorfman and Mark Feisenthal pick up the theme of our last macroblog post:

"Inflation in the United States? The Fed might not see it, but company executives, especially those who sell to consumers, say if it is not here yet, it is on its way.…

" 'There definitely seems to be a disconnect with the Fed's commentary and the experience of the common man,' said Lawrence Creatura, a portfolio manager with Federated Investors."

Messrs. Dorfman and Felsenthal offer this as one possible source of the disconnect:

"So why the disconnect between consumers and executives and the Fed?

"It is because the Fed's top officials, including Bernanke, look at the economy through a prism that compares how fast the economy would grow if firing on all cylinders versus its pace when sputtering.

"Seen that way, there is a wide gap between the current state of the economy and its potential, as measured by the job market."

So it appears they are saying: The Fed thinks inflation can't occur in theory, and therefore it fiddles while the inflation embers burn.

I, as I often remind you, do not speak on behalf of "the Fed's top officials." But I can tell you that this is simply not the source of the advice we are offering here on behalf of the staff of the Atlanta Fed. First, there are the data, duly noted in the Dorfman-Felsenthal article:

"In congressional testimony on Wednesday, Federal Reserve Chairman Ben Bernanke said 'overall inflation is still quite low and longer-term inflation expectations have remained stable.'…

"Also, the Fed likes to see inflation in the range of 2 percent or a bit below. Until recently, inflation had fallen to the point where policymakers worried about the risk of an outright downward deflationary spiral.

"The Fed's preferred measure of inflation, the personal consumption expenditures index, rose a modest 1.2 percent in the 12 months to December, the most recent data shows. Core inflation, which strips out food and energy costs and which the Fed believes is a better indicator of where inflation is heading, has been near five-decade lows."

Yes, I know the headline CPI took a big jump in December. That's what an annualized increase of 145 percent in motor fuel and 62 percent increase in fuel oil will tend to do. But nearly half of prices in the CPI grew at a rate of 1.5 percent or less. Sixty-eight percent grew by 2.1 percent or less.

We recognize that the data are, by definition, yesterday's news, and extrapolating to the future is imperfect (to say the least). For exactly that reason, we do rely—heavily, in fact—on those "consumers and executives" with whom we are purportedly disconnected. In the two weeks prior to every Federal Open Market Committee (FOMC) meeting, we meet face to face with the 44 business leaders (consumers and executives, all) that make up the boards of directors of our main office and the five branches of the Sixth Federal Reserve District. In these meetings we lay out our view of the data, how we are interpreting the information, and what we think it means for the course of the economy going forward. And then we ask them where and how we are getting it wrong.

Advice-seeking is not confined to those 44 directors, however. Our branch system is the basis of what we call our Regional Economic Information Network, or REIN. Through REIN, between each and every FOMC meeting we reach out to literally hundreds of contacts throughout Alabama, Georgia, Florida, Louisiana, Mississippi, and Tennessee. The goal of these interactions is exactly the same as with our directors: Ask real people, making real decisions, about the real circumstances as they see them. And they we ask them what they see coming, share our views on that question, and try to reconcile the two when they differ.

Every Federal Reserve Bank has its own procedures for bringing anecdotal and real-time color and nuance to the data. But we are all doing it one way or another. The picture of a Federal Reserve as disconnected from the on-the-ground realities is simply false.

And what have we been hearing? Yes, certainly highly visible prices and costs have been rising. Yes, some businesses have been able to pass these costs through to customers. Yes, there is some concern about whether price pressures might become more widespread.

But have they yet? Does it seem, as people contemplate market circumstances and their own pricing plans, that widespread price increases are imminent, or even highly probable? The consistent answer we have been getting is no.

We will continue to ask. We are doing it as I write. Jon Hilsenrath and Luca Di Leo note the Chairman's words in a recent Wall Street Journal article:

" 'We do not now have a problem,' Mr. Bernanke said amid repeated questions about inflation from lawmakers during an appearance before the House Budget Committee on Wednesday.

"…lawmakers pressed him on when and how he will begin tightening policy. 'I do want to repeat that we are extremely vigilant,' he said. 'We will be very careful to make sure that we don't wait too long.' "


Photo of Dave Altig By Dave Altig
Senior vice president and research director at the Atlanta Fed

February 11, 2011 in Inflation , Monetary Policy | Permalink

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Comments

Hi guys just a word from the trenches I can understand the need to use models to try to predict whats happening and I appreciate the comments about wanting to get real information from real people about whats happening. Economics is some what of a hobby for me I subscribe to your blog and to the blogs of at least 4 economists .That said I walk around my local grocery store with my calculator and compare adds from 3 different stores and when cucumbers cost $1.00 one week and $1.2 the next thats a 20 % price increase no matter how you slice it , I am also noticing that I am paying the same price for an item that now comes in a smaller package 13% reduction in package size on one item this week . Things like this are happening regularly we are on the low end of the totem pole as are many of our friends and our wages that have been stagnating for years are reaching the point where they can not deal with these increases .Food and fuel are 2 of our major expenses and the pricing volatility is only headed in 1 direction and thats up. These 2 items are having a profound impact on already strained budgets and stripping them out and calling inflation low may work in some circles but not others. Thought you would want to know
Thanks

Posted by: Barry | February 11, 2011 at 04:49 PM

If businessmen, consumers, and the common man all expect inflation, why is the TIPS spread only a couple percent on the 10 year?

Wouldn't you expect it to widen?

Is there another measure of the market's inflation expectation that is as specific and as measurable?

Posted by: Max Rockbin | February 11, 2011 at 06:04 PM

Food inflation is almost totally correlated to the weather. Just had a rough crop in Mexico, where we get a lot of veges from in the winter.

Food prices are headed up.

Posted by: Jeff | February 13, 2011 at 07:06 PM

I think the point that Barry brings up is that consumers don't see prices going up 2 percent a year, but in discontinuous jumps, which can seem more dramatic. Food is volatile because of weather and season. Energy is too, to some extent, but those markets are also subject to manipulation by political and financial players. Commodity markets can be driven by fear of international events, as much as by rational factors. And there hasn't been wage inflation, so people's budgets are squeezed. If food and energy cost more, then less is spent on other less essential goods, keeping prices down overall. All the money the Fed is "easing" into existence isn't ending up in _our_ pockets, that's for sure.

Posted by: Moopheus | February 14, 2011 at 01:15 PM

I've recently noticed an uptick in the data from MIT's realtime inflation data collection
(bpp.mit.edu). I've also personally noticed some change in food packaging (smaller frozen pizzas at same price, etc.).

Is the Fed seeing this too? Is bpp misleading?

Posted by: Raybender | February 15, 2011 at 05:52 PM

The Fed considers inflation to be moderated.. yet Wal-Mart is being priced out of the market as consumers trade down to Dollar General. This was stated just the other day on their investor call with the result of a 1.8% drop in same-store sales. Data from many regions show prices paid by merchants increasing at a 20% annualized rate yet prices they are able to charge increasing at only 2%.

Price ramps in input costs can only go one of two places - it can either hit margins or it can be passed through to consumers. When the consumer is broke and has no job, any attempt to pass it through simply results in lower sales.

How is the housing ATM good while on the upside - you'll pay attention to it by dropping the interest rate to pump sales - but you throw up your hands and assert that the bubble crashing is absolutely impossible to be comprehended or tracked on the downside? Look, the debt taken on through a HELOC remains on the books of real people paying real money... yet the monthly servicing of that debt is counted as "savings."

Here's how all this ties together with this post: Try recalculating CPI using median (or Case-Shiller mean) house prices instead of OER.. I dare you!

Posted by: Unsympathetic | February 23, 2011 at 04:20 PM

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