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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.' "
By Dave Altig
Senior vice president and research director at the Atlanta Fed
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