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.

September 04, 2015

5-Year Deflation Probability Moves Off Zero

Since 2010, our Bank has regularly posted 5-year deflation probabilities derived from prices of Treasury Inflation-Protected Securities (TIPS) on our Deflation Probabilities web page. Each deflation probability, which measures the likelihood of a decline in the Consumer Price Index over a fixed five-year window, is estimated by comparing the price of a recently issued 5-year TIPS with a 10-year TIPS issued about five years earlier. Because the 5-year TIPS has more "deflation protection" than the 10-year TIPS, the implied deflation probability rises when the 5-year TIPS becomes more valuable relative to the 10-year TIPS. (See this macroblog post for a more detailed explanation, or this appendix with the mathematical details.)

From early September 2013 to the first week of August 2015, the five-year deflation probability estimated with the most recently issued 5-year TIPS was identically 0 as the chart shows.

Of course, we should not interpret this long period of zero probability of deflation too literally. It could easily be the case that the "true" deflation probability was slightly above zero but that confounding factors—such as differences in the coupon rates, maturity dates, or liquidity of the TIPS issues—prevented the model from detecting it.

Since August 11, however, the deflation probability has had its own "liftoff" of sorts, fluctuating between 0.0 and 1.3 percent over the 16-day period ending August 26 before rising steadily to 4.1 percent on September 2. Of course, this rise off zero could be temporary, as it proved to be in the summer of 2013.

How seriously should we take this recent liftoff? We can look at options prices on Consumer Price Index inflation (inflation caps and floors) to get a full probability distribution for future inflation; see this published article by economists Yuriy Kitsul and Jonathan Wright or a nontechnical summary in this New York Times article. An alternative is simply to ask professional forecasters for their subjective probabilities of inflation falling within various ranges like "1.0 to 1.4 percent," "1.5 to 1.9 percent," and so forth. The Philly Fed's Survey of Professional Forecasters does just this, with the chart below showing probabilities of low inflation for the Consumer Price Index excluding food and energy (core CPI) from each of the August surveys since 2007.

Although the price index, and the horizon for the inflation outcome, differs from the TIPS-based deflation probability, we see that the shape of the curves is broadly similar to the one shown in the first chart. In the most recent survey, the probability that next year's core CPI inflation rate will be low was small and not particularly elevated relative to recent history. However, the deadline date for this survey was August 11, before liftoff in either the TIPS-based deflation probability or the recent volatility in global financial markets. So stay tuned.

Photo of Pat Higgins
By Pat Higgins, senior economist in the Atlanta Fed's research department

September 4, 2015 in Deflation, Federal Reserve and Monetary Policy, Inflation | Permalink


I just wrote a note to investors citing 'deflation' as 'public enemy number one' , in contradistinction to the market's seemingly relentless concern about a hike in rates by the Fed, and a reaction in which equity markets and long-term bonds sell off. With deflation being more of a risk, as clear from your article, the expectation that long rates will rise seems unfounded.
I wish I had seen your article before launching my note as i would have cited it w/proper attribution.
I look forward to seeing more of your work on this topic.

Posted by: Ed L. | September 08, 2015 at 11:48 AM

Post a comment

Comments are moderated and will not appear until the moderator has approved them.

If you have a TypeKey or TypePad account, please Sign in

August 10, 2012

Deflation Probabilities on Our Radar Screen

In the latest Wall Street Journal Economic Forecasting Survey, conducted August 3–6, economists were asked whether they "expect[ed] the Fed to start another round of large-scale bond buying in 2012?" Sixty-three percent answered yes, and 49 percent expected a program would be announced in September, presumably at the end of the next meeting of the Federal Open Market Committee (FOMC) on September 12–13. Obviously this question is of interest to more than just business economists. For example, at his July 17 testimony before the Senate Committee on Banking, Housing, and Urban Affairs, Sen. Mike Crapo asked Fed Chairman Ben Bernanke whether the FOMC should seriously consider more quantitative easing going forward. As part of his response, the Chairman said that "we would certainly want to react against any increase in deflation risk." The entire video exchange can be viewed at the 52–55 minute mark here.

As part of the Atlanta Fed's Inflation Project, we regularly update probabilities of deflation in the Consumer Price Index (CPI) estimated from Treasury Inflation-Protected Securities (TIPS) prices, described here and here. The basic idea is that a recently issued 5-year TIPS has less "deflation protection" than a 10-year TIPS maturing about the same date as the 5-year TIPS. The yield spread between the 5-year TIPS and 10-year TIPS can be used to help estimate the probability of deflation.

The most recent (August 8) estimate puts the 5-year probability of deflation from early 2012 to early 2017 at around 15 percent. As seen in the figure below this probability is up slightly from May, but only about half the readings of the 5-year (2010–15) deflation probability seen in the late summer and early fall of 2010 and considerably below readings seen during the height of the financial crisis in late 2008 and early 2009.

It is important to note that these deflation probabilities are estimates based on a relatively simple model that uses a number of assumptions that not everyone may agree on. Jens Christensen, Jose Lopez, and Glenn Rudebusch at the Federal Reserve Bank of San Francisco have built an alternative model for estimating deflation probabilities that also uses TIPS yields. At the time of the publication of their paper in 2011, their model's probabilities were somewhat lower than—but highly correlated with—ours.

The TIPS market has a number of features that make inferring both inflation expectations and deflation probabilities from them tricky. Most notably, there are unknown liquidity differences between TIPS and nominal Treasury securities. A more direct way of estimating deflation probabilities—or in fact the entire probability distribution of future CPI inflation—using so-called inflation caps and floors has recently been explored by economists Yuriy Kitsul and Jonathan Wright. Inflation caps and floors are essentially options on the Consumer Price Index. We used the Kitsul and Wright method for constructing the implied probabilities of (annualized) CPI inflation over the next five years. As seen in the figure below, this method implies a 13 percent probability that inflation will be 0 percent or negative on average over the next five years. This probability is about at the midpoint of the range that prevailed between October 2009 and March 2012. (See figure 3, on page 29 of Kitsul and Wright's working paper.)

As Kitsul and Wright explain, the market for inflation caps and floors is still quite small relative to the TIPS market. So the deflation probabilities from their model should be considered suggestive, as should our own.

What's the takeaway from all this? Well, readings from the financial market indicate the likelihood of a sustained deflation is currently about 15 percent, or a bit less. That's up from earlier in the year, but not nearly as high as in 2010.

Should we be concerned about the prospect for deflation in the years ahead? This is obviously an important policy question. But I'm not a policymaker; I merely put up the numbers for you to consider. And, of course, we will continue to follow these indicators closely—as can you. Our deflation probability estimates are updated every Thursday and posted on our Inflation Project.

Partick Higgins By Patrick Higgins, an economist in the Atlanta Fed's research department

August 10, 2012 in Deflation, Inflation | Permalink


TrackBack URL for this entry:

Listed below are links to blogs that reference Deflation Probabilities on Our Radar Screen:



What relevance would you give to market demand for government securities? I have generally equated high demand with hedging against perceived deflation risk, even though the data suggest the two are actually diverging. Can bond market signalling be used reliably to determine probability of phase change from inflationary to deflationary environment or vice versa?

Posted by: Ben Johannson | August 11, 2012 at 01:59 AM

Sustained deflation seems unlikely. A far more likely explanation/interpretation (that btw agrees with 1 and 2-yr breakeven-implied TIPS inflation over the June/July time period) is that there is a significant chance that one year of the next five will see deflation. In other words: be very afraid.

Posted by: dwb | August 11, 2012 at 01:32 PM

How could one go about assessing the same calculation using PPI vs. CPI? I am curious if there are any notable differences between the underlying index for inflation as it could potentially have implications for profit margins.

Thanks for your time and efforts.

Posted by: Danny | August 15, 2012 at 10:43 AM

Post a comment

Comments are moderated and will not appear until the moderator has approved them.

If you have a TypeKey or TypePad account, please Sign in

May 17, 2012

Is inflation targeting really dead?

Harvard's Jeffrey Frankel (hat tip, Mark Thoma) is the latest econ-blogger to cast an admiring gaze in the direction of nominal gross domestic product (GDP) targeting. Frankel's post is titled "The Death of Inflation Targeting," and the demise apparently includes the notion of "flexible targeting." The obituary is somewhat ironic in that at least some of us believe that the U.S. central bank has recently taken a big step in the direction of institutionalizing flexible inflation targeting. Frankel, nonetheless, makes a case for nominal GDP targeting:

"One candidate to succeed IT [inflation targeting] as the preferred nominal monetary-policy anchor has lately received some enthusiastic support in the economic blogosphere: nominal GDP targeting. The idea is not new. It had been a candidate to succeed money-supply targeting in the 1980's, since it did not share the latter's vulnerability to so-called velocity shocks.

"Nominal GDP targeting was not adopted then, but now it is back. Its fans point out that, unlike IT, it would not cause excessive tightening in response to adverse supply shocks. Nominal GDP targeting stabilizes demand—the most that can be asked of monetary policy. An adverse supply shock is automatically divided equally between inflation and real GDP, which is pretty much what a central bank with discretion would do anyway."

That's certainly true, but a nominal GDP target is consistent with a stable inflation or price-level objective only if potential GDP growth is itself stable. Perhaps the argument is that plausible variations in potential GDP are not large enough or persistent enough to be of much concern. But that notion just begs the core question of whether the current output gap is big or small. At least for me, uncertainty about where GDP is relative to its potential remains the key to whether policy should be more or less aggressive.

In another recent blog item (also with a pointer from Mark Thoma), Simon Wren-Lewis offers the opinion that acknowledging uncertainty about size of the output gap actually argues in favor of being "less cautious" about taking an aggressive policy course. The basic idea is familiar. It is a simple matter to raise rates should the Fed overestimate the magnitude of the output gap. But with the short-term policy rates already at zero, it is not so easy to go in the opposite direction should we underestimate the gap.

No argument there. As I pointed out in a May 3 macroblog item, Atlanta Fed President Dennis Lockhart has said the same thing. But, as I argued in that post, this point of view is only half the story. Though I agree that the costs are asymmetric to the downside with respect to the FOMC's employment and growth mandate, they look to me to be asymmetric to the upside with respect to the price stability mandate. And I view with some suspicion the claim that we know how to easily manage policy that turns out to be too aggressive after the fact.

My issues are not merely academic. In an important paper published a decade ago, Anasthsios Orphanides made this assertion:

"Despite the best of intentions, the activist management of the economy during the 1960s and 1970s did not deliver the desired macroeconomic outcomes. Following a brief period of success in achieving reasonable price stability with full employment, starting with the end of 1965 and continuing through the 1970s, the small upward drift in prices that so concerned Burns several years earlier gave way to the Great Inflation. Amazingly, during much of this period, specifically from February 1970 to January 1977, Arthur Burns, who so opposed policies fostering inflation, served as Chairman of the Federal Reserve. How then is this macroeconomic policy failure to be explained? And how can such failures be avoided in the future?...

"The likely policy lapse leading to the Great Inflation …can be simply identified. It was due to the overconfidence with which policymakers believed they could ascertain in real-time the current state of the economy relative to its potential. The willingness to recognize the limitations of our knowledge and lower our stabilization objectives accordingly would be essential if we are to avert such policy disasters in the future."

With this historical observation in hand, it seems a short leap to turn Wren-Lewis's thought experiment on its head. Arguably, the last several years have demonstrated that nonconventional policy actions have been quite successful at short-circuiting the disinflationary spirals that pose the central downside risk when interest rates are near zero. (If you can tolerate a little math, a good exposition of both theory and evidence is provided by Roger Farmer.)

On the opposite side of the ledger, we know little about the conditions that would cause the Fed to lose credibility with respect to its commitment to its inflation goals, and very little about the triggers that would cause inflation expectations to become unanchored. Thus, I think it not difficult to construct a plausible argument about the risks of being wrong about the output gap that is exact opposite of the Wren-Lewis conclusion.

I end up about where I did in my previous post. Flexible inflation targeting, implemented in such a way that the 2 percent long-run inflation target rate exerts an observable gravitational pull over the medium term, feels about right to me. Despite what Frankel seems to believe, I think that idea is far from dead.

David AltigBy Dave Altig, executive vice president and research director at the Atlanta Fed

May 17, 2012 in Deflation, Economic Growth and Development, Federal Reserve and Monetary Policy, Inflation, Monetary Policy | Permalink


TrackBack URL for this entry:

Listed below are links to blogs that reference Is inflation targeting really dead?:


"The obituary is somewhat ironic in that at least some of us believe that the U.S. central bank has recently taken a big step in the direction of institutionalizing flexible inflation targeting."

Well, sort of. First of all, the Fed's forecasts certainly look like 2% PCE is an upper limit not an average, most commentators rightly called foul after the last quarterly set of forecasts. There is no de-facto difference right now between strict inflation targeting with a 2% ceiling and what the fed is doing. ther is no "flexible" in the target, and the range of full employment forecasts is 5-7%, we are still well above that yet there is no tolerance for higher inflation. So no I would not say "we took a big step forward."

In fact, nominal expectations have collapsed (see beckworth and the Evans new paper) so i would say the Fed has zero credibility on the unemployment side of the mandate. unsurprisingly, confidence and planned expenditures have collapsed. Its not a structural thing.

TIPS markets are screaming: epic fail.

Second, the fed cannot promise to control import prices (and indeed, tightening in response to a supply shock is textbook bad macro). The Fed should only focus on the price of domestically produced goods (gdp deflator). The Fed should have payed more attention to the gdp deflator and less to the PCE during the 2003-2008 period. Cheap imports depressed the PCE early, then expensive oil pushed it up in 2008. Policy would have been tighter, earlier.

At Sept 16th 2008 meeting, despite declining employment, tight credit, high mortgage delinquencies, housing market is recession since 2006, and declining GDP deflator, the Fed was concerned about inflation - not the clearly weakening economy (because oil and commodities prices were high). 3 days later Lehman collapsed and 3 weeks later they eased.

If you think the Fed follows a "balanced Taylor Rule" using output and inflation (use the GDP deflator as i said above) thats just ngdp targeting, except that the Fed promises to correct its own errors over a 5 year period so that the average works out.

Also, another aspect of ngdp targeting is that it prevents a debt-deflation spiral that happened in 2008 (and i think this is what prevented the 1990 real estate bubble from becoming worse in 1990s).

So, yes, IT is dead. RIP and good riddance.

Posted by: dwb | May 17, 2012 at 11:34 PM

thanks for reading comments, this is an interesting debate. Just a couple points as I forced myself to go back and reread Orphanides paper.

1) He used the GDP deflator. I view the conclusions as applied to the Fed framework with suspicion there since the Fed targets PCE and we know they sent very different signals during 2008;

2)The Taylor rule performs worse under imperfect information about the output gap (see figure 9); in fact ngdp targeting still is better under perfect information than strict inflation targeting. This is consistent with McCallum's 1998 results as well as i recall.

3)His ngdp rule is a *growth rule* not a path rule; Sumner and Beckworth propose a path rule (i.e. the Fed promises to correct errors so that the 5 year average (say) is on a target path. Important difference.

4)The chief criticism is that we do not know what potential output is, therefore do not know what to set the path to. But we can observe the trend GDP deflator and adjust the path as needed to be consistent.

I think that if you were to compare Sumner/Beckworth ngdp path level targeting to gdp deflator path level targeting, or inflation targeting using the GDP deflator, then there would only be a very mild difference.

The crucial differences are: the response to supply shocks (the Fed can only control domestic goods prices); and all the theory and evidence that ngdp targeting avoids debt-deflationary spirals like we saw in 2008. Again, compare the response to the housing real estate in the early 90s (yes, we had a housing crisis then too!).

Posted by: dwb | May 19, 2012 at 02:31 PM

Another reason NGDP level targeting trumps inflation targeting: it would not allow expectations of nominal income growth to collapse.


Posted by: Anon1 | May 19, 2012 at 10:00 PM

Post a comment

Comments are moderated and will not appear until the moderator has approved them.

If you have a TypeKey or TypePad account, please Sign in

March 23, 2012

Why we debate

It's been a while since we featured one of my favorite charts—a "bubble graph" comparing average monthly job changes during this recovery with average changes during the previous recovery, sector by sector.

If you try, it isn't too hard to see in this chart a picture of a labor market that is very close to "normalized," excepting a few sectors that are experiencing longer-term structural issues. First, most sectors—that is, most of the bubbles in the chart—lie above the horizontal zero axis, meaning that they are now in positive growth territory for this recovery. Second, most sector bubbles are aligning along the 45-degree line, meaning jobs in these areas are expanding (or in the case of the information sector, contracting) at about the same pace as they were before the "Great Recession." Third, the exceptions are exactly what we would expect—employment in the construction, financial activities, and government sectors continues to fall, and the manufacturing sector (a job-shedder for quite some time) is growing slightly.

For the skeptics, I below offer a familiar chart, which traces the level of total employment pre- and post-December 2009, compared with the average path of pre- and post-recession employment for the previous five downturns:

We are now more than 16 quarters past the beginning of the recession that began in the fourth quarter of 2007, and total employment is still 4 percent lower than it was at the beginning of the downturn. In the previous five recessions by the time 16 quarters had passed, employment had increased by about 6 percent. Even in the worst case, indicated by the lower edge of the gray shaded area, employment growth was flat—and that observation is qualified by the fact that the recovery from the 1980 recession was interrupted by the 1981–82 recession.

This unhappy comparison is not driven by the construction, financial activities, and government sectors. In the area of professional and business services, which has logged the largest average monthly employment gains in the current recovery, the number of jobs still sits 2.7 percent below the level at the outset of the last recession, as the chart below shows.

Total private-sector jobs in education and health services, which never actually contracted during the recession, nonetheless remain abnormally low in historical context.

In these charts lies the crux of some very basic disagreements about the appropriate course of policy. The last three graphs draw a clear picture of labor markets that are underperforming by historical standards—a position that I take to be the conventional wisdom. An argument against following that conventional wisdom centers on the question of whether historical standards represent the appropriate yardstick today. In other words, is the correct reference point the level of employment or the pace of improvement in the labor market from a permanently lower level? For the proponents of the latter view, the bubble chart might very well look like a return to normal, despite the fact that employment has not returned to prerecession levels.

One way to adjudicate the debate, in theory, is to rely on the trajectory of inflation. If there remains a significant amount of slack in labor markets, as the conventional interpretation of things suggest, there ought to be consistent downward pressure on prices. The case for consistent downward pressure on prices is not so obvious. Measured inflation appears to moving in the direction of the Federal Open Market Committee's 2 percent long-term objective.

Also, the Atlanta Fed's own monthly survey of business inflation expectations, which surveys a panel of businesses from our Reserve Bank district, indicates that this inflation number (shown in our March release from earlier this week) is in line with what private-sector decision makers anticipate:

"Survey respondents indicated that, on average, they expect unit costs to rise 2.0 percent over the next 12 months. That number is up from 1.9 percent in February and comparable to recent year-ahead inflation forecasts of private economists. Firms also reported that their unit costs had risen 1.8 percent compared to this time last year, which is unchanged from their assessment in February. Inflation uncertainty, as measured by the average respondent's variance, declined from 2.8 percent in February to 2.4 percent in March, the lowest variance since the survey was launched in October 2011."

Does that settle it? Not quite. There may not be much evidence of building disinflationary pressure, but neither is there building evidence of an inflationary push that you would expect to see if the economy were bumping up against capacity constraints. Obviously, the story isn't over yet.

David AltigBy Dave Altig, senior vice president and research director at the Atlanta Fed


March 23, 2012 in Deflation, Employment, Federal Reserve and Monetary Policy, Inflation, Labor Markets, Monetary Policy | Permalink


TrackBack URL for this entry:

Listed below are links to blogs that reference Why we debate:


I like your Employment chart. The bubbles giving the labor group size is a nice addition.

On thing on inflation: I picture inflation as a tug-of-war between the money supply and economic growth. Normally, I would say both teams have 1 person on each side of the rope. However, in present times, we have had extended periods of very low interest rates pumping inflation up while a slow economy is tugging it down. The teams are much bigger in this case, 10 on each side. When one side eventually falls in the mud, the consequences will be much greater due to the higher tension.

Inflation may be moderate for now, but we are balanced on a knife edge.

Posted by: BTN | March 26, 2012 at 12:41 PM

Inflation can be a headache in these situations. Employment must be high to counter such effects.

Posted by: Dallas Real Estate | March 30, 2012 at 05:23 PM

If one assumes that there has a been a structural shift in the labor market in the past twenty five years, what do the average charts look like for the past three cycles (as opposed to five)?

Posted by: dickens | April 03, 2012 at 01:09 PM

Post a comment

Comments are moderated and will not appear until the moderator has approved them.

If you have a TypeKey or TypePad account, please Sign in

June 13, 2011

Core cuts both ways

With the six-month average of annualized headline inflation running just over 5 percent, this Wednesday's consumer price index (CPI) report looms a little larger than usual. While it is dangerous to predict such things, there is every reason to believe that the measured increase in CPI inflation for May could be quite low. And there is every reason to believe that this softness will persist into June.

The reason is quite simple. Movements in gasoline and fuel prices really do push around the headline inflation number, and at long last it looks like that movement is in the downward direction. Here's the relevant picture:


Let's assume that, annualized, CPI excluding food and energy rises 2.1 percent, as it has so far this year, and food and nongasoline energy prices each rise at 5 percent. Then when you plug in gasoline prices already realized for May and EIA predictions for June, you get a 0.4 percent rise in the headline CPI in May and a 0.7 percent decline in June (both rates annualized).

Despite some probable relief on the headline inflation number, I remain aware of what that relief means and what it does not. Earlier in the year, Atlanta Fed president Dennis Lockhart had this to say:

"I want to contrast inflation to the cost of living. In casual language, we often interpret a rise in the cost of living as inflation. They are not the same thing. Cost-of-living increases are a result of increases in individual prices relative to other prices and especially relative to income. These relative price movements reflect supply and demand conditions and idiosyncratic influences in the various markets for goods and services…

"… The Fed, like every other central bank, is powerless to prevent fluctuations in the cost of living and increases of individual prices. We do not produce oil. Nor do we grow food or provide health care. We cannot prevent the next oil shock, or drought, or a strike somewhere—events that cause prices of certain goods to rise and change your cost of living."

Two points, then. First, even if things evolve as the chart above suggests, the level of gasoline prices will remain relatively high by recent standards. Low inflation readings for the next couple of months would therefore leave the cost-of-living high by recent standards, a fact that is not lost on us here at the Atlanta Fed.

Second, as President Lockhart's comments reveal, we were reluctant to attribute the run-up in fuel prices to monetary policy. And I imagine we will be equally reluctant to credit monetary policy with any relief from that trend.

In fact, I will fearlessly predict that, should our guess here about headline inflation in the next couple of months be proved accurate, we will point to core inflation measures as reason to look through some very low inflation readings. See these comments from President Lockhart's most recent speech for some additional perspective:

"Are the recent outsized increases in headline inflation the best signals of the inflation trend going forward? Or are other statistics—like core inflation or measures of inflation expectations—yielding a truer picture of what lies ahead?

"The answer matters a lot. And it certainly weighs heavily on my thinking. I would not hesitate to support an exit from our current policy stance if I believed that the headline inflation number of the past six months is really indicative of the underlying trend inflation rate. I don't believe this to be the case. And I am wary of tightening monetary policy in the face of quite ambiguous economic circumstances unless doing so is absolutely necessary to meet the FOMC's price stability mandate."

And here's why it matters, quoting President Lockhart from an interview with Reuters last week:

"In the interview, Lockhart said maintaining an easy Fed policy stance should ensure the moderate U.S. recovery does not fall off the rails."


"How high would the bar be for further Fed easing?

"It would take 'a significant deterioration as reflected in the overall economy, a set of deflationary signals and also unemployment numbers that rise dramatically. Last fall (when the Fed launched QE2), by some measures, we were seeing declining inflation expectations that were headed in a pretty negative direction, and that was happening pretty rapidly. We were in a disinflationary environment. So the risk of deflation was plausible. We acted and the situation has turned around. That was, at least in my way of thinking, very central to supporting the policy. We don't have anything remotely like a deflationary risk at the moment, short of a shock of some kind.' "

If what I suggest above—falling headline inflation, stable core inflation—comes to pass in the near term, don't expect me to start ringing the disinflationary bell.

This isn't the last word on the usefulness of core inflation statistics, and the debate is certain to rage on (see here and here, for recent installments). But I do hope that this post is remembered the next time the Federal Reserve is accused of hiding inflationary pressures behind the rhetoric of core.

Update: The May CPI report is in, and once again the facts trump arithmetic. We got the flip in the headline/core measures right; the rest, not so much.

Update: Here's one way to construct a synthetic CPI:


CPIHeadline(T) is the calculated value of the seasonally adjusted CPI in month T > December 2010. CPIHeadline(Dec2010) is the reported seasonally adjusted headline CPI for December 2010. CPIFood, CPICore, CPIGas, CPIOtherFuel, and CPIHHenergy are the seasonally adjusted component level CPI indexes for the above mentioned components. Note that this formula will not exactly replicate the January through April 2011 headline CPI since the components are not granular enough. When using the above formula to compute CPIHeadline(Apr11) and CPIHeadline(May11), we compute one-month headline inflation in May 2011 as the percent difference between the values of CPIHeadline(Apr11) and CPIHeadline(May11), both calculated with the above formula (i.e., do not use the reported value of CPIHeadline(Apr11)). In our calculations we used the same inflation assumptions for "other motor fuels" and "household energy" (both increase at a 5 percent annualized rate in May and June). By Patrick Higgins, an economist at the Atlanta Fed

David AltigBy Dave Altig, senior vice president and research director at the Atlanta Fed

June 13, 2011 in Deflation, Federal Reserve and Monetary Policy, Inflation, Monetary Policy | Permalink


TrackBack URL for this entry:

Listed below are links to blogs that reference Core cuts both ways:



Can you share the exact equation to create headline inflation given Core, food and non-gas energy, and gas prices?

For example, assume core at 2.1%, assume food and non-gasoline energy go up at 5%, then plug in some gasoline price. Whats the exact equation?


Posted by: TC | June 13, 2011 at 10:12 PM

Dave thinks that we will have a negative print for CPI in June. I will wait and see if that happens. I doubt it.

I can't understand how Dave and the others at the Fed can push this kind of thinking. Bernanke has said several times that QE has brought us high stock values. The same forces that raise equities push up other asset classes as well. You can't get only "good" inflation when the printing presses are running and ZIRP is a three year long policy.

It would behoove the Fed to acknowledge their role in the run up in global inflation. When they try to deny the obvious connection they just lose credibility.

Posted by: Bruce Krasting | June 14, 2011 at 06:46 AM

Hi Bruce,

Read your work constantly and like it. Don't always agree, but it is good.

If oil falls to $90, we're going see negative headline CPI, period. There is a strong chance we will see far greater declines in the price of oil once Libya comes back on line. Germany just recognized the rebels as the legitimate government of Libya.

The headline inflation is being caused by a massive speculative bid under oil. This speculative bid in oil is very likely to get crushed. It could happen as soon as this week. Once that happens, then we're going to see a long string of negative CPI prints.

Posted by: TC | June 14, 2011 at 09:38 AM

TC - It's fairly straightforward to derive the weighting of gasoline from the example given.

The (rather straightforward) general calculation method is given by Wikipedia; specifics are maintained by the BLS.

Posted by: Ken Houghton | June 14, 2011 at 12:53 PM

TC. Tks.

Your comments on Libya and short term movements in crude make an excellent point:

The way we/the Fed measures inflation is flawed.

Yes, energy is a critical variable in the CPI. What is missing is how things are creeping up on us.

How about higher education? 25% per year sound right?

Health care Ins? At least 20% per year.

Transportation, clothing or rent? Try 10% in the last 6 months.

How about silly things like tolls or even traffic fines? 30%?

Seen the price for a bag of cement lately? Roofing shingles? Copper fittings? Nails? PVC pipe? It's across the board.

Food is off the charts. The Fed knows this. I'm sure that some of the folks who work there actually go to a store once in a while and sees what is going on.

But they have the nerve to tell us that things like an IPAD remaining stable in price while the CPU has increased is a net reduction to the real things we have to buy.

No sale. Sorry.

You may not agree with what I write. But consider the words from Bernanke way back in 2003. I wrote about it today. This blog brought on my effort. Forget my words. Focus on Ben's. In particular, the last quote in the article.


Posted by: Bruce Krasting | June 14, 2011 at 08:32 PM

Excellent work, David.

Could you explain the Fed's logic for requiring such a high bar on further monetary easing?

Suppose core inflation stayed roughly where it's at -- well below 2 percent, and unemployment stayed roughly where it's at, around 9 percent, perhaps coming down only very gradually.

You're saying the Fed's going to do nothing more in this case.

Is there a reason for that?

And, can you make a distinction between the Fed's strategy and the Japanese Central Banks' strategy circa 1993-2011?

@Bruce Krasting: If QE causes inflation in commodities, 1 for 1 increase in Excess Reserves notwithstanding, then how come most of the QE came in 2008, and yet we've had core inflation below 2% for three years in a row now? Seems like high unemployment and low AD are keeping a lid on your wage-price spirals there, just as theory says it should...

Posted by: Thorstein Veblen | June 14, 2011 at 10:08 PM

Fairly basic economic theory can explain changes in prices for a specific product, service, or commodity, or "good". There are only three possible factors:

1) Supply curve
2) Demand Curve
3) Money supply (in the widest possible measurement)

The first two are market driven forces, a function of human beings making choices in the backdrop of whatever economic system in which they operate (which is now quite global). Exogenous forces such as the government distort the supply or demand curves through policy (such as subsidies, price controls, war, tax code, etc). Natural factors such as whether or climate, or the existence or lack thereof natural resources can affect both curves.

But the ability of a government (via a central bank, typically) to expand or contract the money supply affects prices in a predictable way, holding all other things equal. Remember that simple phrase?

Changes in prices of goods as a result of supply and demand is NOT inflation. They are simply...changes in prices...which is a normal part of a market economy.

Indeed, over time, absent monetary inflation, REAL prices of goods tend to gently decline, as a result of technology. And this gradual decline in prices is how we improve our standard of living over time. It is INCREDIBLE that this basic economic fact is now lost.

The reason there is a source of confusion is how "inflation" is measured. The central bank specifically wants us to think of it in terms of changes in prices. But this is misleading. the proper meaure of inflation would be the increase in price aboe the level where it otherwise would be...were we not to have monetary expansion.

We can have 0% change in the CPI...and still have inflation. Take housing: if we had not had the massive monetary expansion in the last two years, housing prices would have DECLINED much more and much more rapidly. As such, prices are INFLATED...they are being propped up. This is every bit as inflationary as prices increasing as a function of monetary expansion.

The Fed has blurred the line among supply, demand, and monetary expansion...and how much eaach of these affect prices. They don't WANT market participants to be able to isolate the effect that monetary expansion has on prices. In that way, the government can inflate, as we don't easily see just how much dilution of the dollar we are experiencing. Notice the persistent talk about how declining prices are synomomous with DEFLATION, and how this is supposedly bad. A free market will produce naturally declining prices, i.e. a greater standard of living via greater purchasing power. And this is regarded as negative?

Or...we allow an inflation bubble to pop, and the artificial prices brought about by monetary inflation return to where they should be...and this is negative?

It is only negative to the government itself, or to those participants that benefitted from the inflation in the first place. The rest of us are gradually payings its price...through a stealth (and at times not so stealth) decline in the purchasing power of our currency.

Posted by: Chris | June 14, 2011 at 11:35 PM


I wrote about this recently. Go to the 6th chart. It tracks the growth of the Fed's balance sheet (QE) and the CRB.

The correlation between the two is 85^2. In my world that is a very tight correlation. It could not be this high by coincidence.

Review the chart and make your own conclusions.

You may respond; Baloney! The CRB is not the CPI! And you would be right.

I say that CPI is a lousy yardstick. Core is even worse in my opinion. But that is what is used to establish monetary policy.

* CPI-W is up 3.5% in the past six months. Inflation is ripping at an annual rate north of 7% by this measure. That's 3+Xs times the rate of "a little below 2%" that Bernanke has promised.

* High quality arable farmland has doubled in price in just the past three years.

Who's gambling with inflation? I think the Fed is.

Link to article with charts:

Posted by: Bruce Krasting | June 15, 2011 at 08:44 PM

Hi Bruce,

I am not sure exactly what should be included when measuring inflation, and I am convinced nobody really knows for sure. There is no perfectly accurate measure of inflation, and all of the points you mention are very true.

But the government measure of inflation is pretty good. I'd say it is one of the best measures we have. I think this for a few reasons, but the most obvious is that we have yields from the bond markets that need to make sense when we compare them to inflation.

If inflation is being undercounted - like you are claiming here and I've seen you claim in other places - the U.S. government will actually make money when it issues bonds.

I go over the math in a post at my place, but I am sure you know it too. It's standard line MBA style thinking on rates. (1 + Treasuries) = (1 + inflation)*(1 + real rate)


I call it the hyperinflation hoax, because if we were seeing high levels of inflation, the best way for the U.S. to reduce its debt to GDP would be to borrow more money. Nonsensical results like this make the argument for any inflation much higher than 3% suspect, IMHO.

The real rate of return or real yield is what matters for the government. If inflation is anything higher than the BLS says it is, then the government is "paying" a hugely negative rate of interest even on the longest bonds. Paying a negative rate is the same as getting paid. If inflation is higher than 4%, the U.S. is making a ton of money just issuing 6 month T-bills at .11

I go after shadow stats a decent amount because he claims that old measures of inflation would show we have 10% plus inflation. But if we have 10% plus inflation, that means the U.S. government is actually making about 10% on its T-Bills, because T-Bill rates are almost zero.

Inflation in energy has horrible consequences - I am not denying that. But I don't blame speculation on the fed. I don't know how you might finance your trading margins, but most professionals use T-Bills, not cash. Forcing people into cash - like the fed is supposedly doing - should actually reduce speculation, because the vehicle most professionals use to fund speculation is not cash, but T-Bills.

Anyway, enjoy your work - and thanks for sharing your thoughts on so many topics!



Posted by: TC | June 16, 2011 at 09:46 AM

Post a comment

Comments are moderated and will not appear until the moderator has approved them.

If you have a TypeKey or TypePad account, please Sign in

March 07, 2011

One chasm that really isn't one

Floyd Norris, writing last Friday in the The New York Times, fretted about "The Chasm Between Consumers and the Fed." We here at the Atlanta Fed share some of that concern, and indeed the Times article quotes from a speech by our president Dennis Lockhart on just that subject from last month. But then Norris takes a turn I didn't expect. Norris's Times article includes the following chart…

…and the article proceeds:

"The Fed's goal is to keep the inflation rate at or near 2 percent, and it does not expect a significant increase for at least a few years. … The stock market is generally thought to do better when inflation is falling, but Martin Fridson, the global credit strategist for BNP Paribas Investment Partners, points out that is not always the case. There is, he says, a time when inflation is too low.

"The accompanying chart, based on a report by Mr. Fridson, shows that from the 1940s through the 1990s, there generally was a relationship. The more inflation declined in a decade from inflation in the previous decade, the better the stock market did.

"But in two decades, the 1930s and the first decade of this century, inflation fell from already low levels and the stock market suffered. 'Below a certain level of inflation,' Mr. Fridson said, 'a further decline reflects economic weakness more than it reflects a salutary reining in of excessive monetary creation.'

"If that is correct, then it could be that both investors and those simply concerned with promoting economic growth should, as Mr. Fridson wrote, hope that Mr. Bernanke 'fails in his stated goal of holding inflation to 2 percent or less.' "

It was all good, up to that last paragraph. As President Lockhart reiterated in a speech today (emphasis added):

"I'll explain the technical rationale of my Reserve Bank in supporting the scope of LSAP2 [the second round of large-scale asset purchases] last November.

"Through the summer and into the fall of last year, our internal forecasts at the Atlanta Fed were calling into question whether the policy stance at the time assured progress toward the committee's growth and price stability objectives. In more normal times, these circumstances would have prompted a cut in the FOMC's [Federal Open Market Committee] target for the federal funds rate. This approach would be (would have been) the prescription of the so-called Taylor rule which relates policy rate moves to forecast 'misses' on the Fed's sustainable growth and stable inflation objectives."

As we've argued in macroblog before, keeping inflation from falling below that "certain level of inflation" reflecting "economic weakness more than it reflects a salutary reining in of excessive monetary creation" was exactly what President Lockhart has offered in defense of implementing LSAP2, and in support of claims to its success.

There remain plenty of policy questions on which intelligent well-intentioned folk can disagree, but on the assertion that it is wise to guard against too much disinflation, we are in agreement. No need to find disagreements that aren't really there.

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

March 7, 2011 in Deflation, Federal Reserve and Monetary Policy, Inflation, Monetary Policy | Permalink


TrackBack URL for this entry:

Listed below are links to blogs that reference One chasm that really isn't one:


David, your colleagues' assertion that "wrongful foreclosures can only happen if the borrower is delinquent" is simply mendacious. Wrongful foreclosures happen to millions of Americans every year. Here's how it happens:

The institution that forecloses doesn't actually own the paper. They submit a robosigned or otherwise fraudulent set of documents to cover for the fact that they are not actually holders of the debt they claim to have. That is, the bank foreclosed but legally the American in question doesn't owe them the money.

The institution that forecloses caused the foreclosure through its own wrongful acts. They force-placed insurance on a house that had insurance (or an available policy which they failed to pay from escrow, thereby causing the cancellation) and that began the spiral. They placed a payment off by a couple of cents into a suspense account, refused further payments and foreclosed. They told homeowners to stop paying to qualify for a modification but never intended to actually provide one, or the owner didn't qualify. They were offering a modification but "lost" documents repeatedly and then foreclosed. Or anyone of a number of other wrongful acts - all of their hand, not the homeowners.

This is egregious. Do something about it.

Posted by: Unsympathetic | March 11, 2011 at 04:27 PM

As a non-economist I hate to be the one to point this out, but the stock market isn't the economy. Remind me again why I should be concerned about a casino?

Posted by: cahuenga | March 13, 2011 at 07:55 AM

Post a comment

Comments are moderated and will not appear until the moderator has approved them.

If you have a TypeKey or TypePad account, please Sign in

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.

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

December 22, 2010 in Deflation, Inflation | Permalink


TrackBack URL for this entry:

Listed below are links to blogs that reference An inflation (or lack thereof) chart show:


Can the Federal government afford ANY inflation? Isn't the FED playing with fire, when we can clearly see the massive liabilities directly ahead?
Commodity inflation helps Canada and Australia but is suicide for the US, since the middle east is slowly easing away from the dollar.
The only card the US has left is the dollar, it should be defending it as though it's life depends on it........it does!
The best case scenario for the US is a Japanese style low growth, low interest rate environment. Over promised pension and health care liabilities need to correct to their viable level. Pushing the dollar carry trade is creating massive gambling and we know how that will turn out.
As Chuck Prince said, as long as the music is playing, you gotta get up and dance....the US cannot afford the fallout when the music stops. The next bust takes down the system. Pension fund gambling will probably be the trigger for the coming meltdown.

Posted by: Groucho | December 24, 2010 at 09:17 AM

a lot of people fanning the inflation fears are pointing to the softs; sugar, coffee, cocoa and cotton. However, they had bad crop years. Next years crop prices right now are considerably lower.

However, meat and grain prices for next year are higher than this year.

Demographics also point to less domestic inflation. As populations age, they demand less in terms of durable goods etc.
The US population is aging.

It's a cloudy picture for sure. The one axiom that I think you should be able to hang your hat on is that there will be little inflation without employment improving.

Posted by: Jeff | December 26, 2010 at 03:35 PM

"Afford" inflation? We can't afford not to have inflation! We need more inflation to stimulate the economy and reduce the value of existing debts.

Posted by: Beet | January 01, 2011 at 07:21 PM

The short term prices like grain for feed and planting have long term implications. Russian wheat contracts driving the feed lot prices off the charts have not been priced in at the end user yet the consumer will be paying a lot more for that steak or burger until all the cattle and hogs are sold eaten or we all start eating carrots. How on earth can the government spend and print spend and print without the slippery slope taking over just like it did in the 70's. I remember the gas lines and int. rates of 18% at the bank on CD's and I think Mr. Greenspan does too!

Posted by: David Sobel | January 06, 2011 at 11:58 PM

Post a comment

Comments are moderated and will not appear until the moderator has approved them.

If you have a TypeKey or TypePad account, please Sign in

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


December 17, 2010 in Deflation, Inflation, Interest Rates, Monetary Policy | Permalink


TrackBack URL for this entry:

Listed below are links to blogs that reference What's behind the recent rise in Treasury yields?:


Remember to check changes in CDS to see if any part of the change in real yields is due to a change in credit risk.

Posted by: tew | December 17, 2010 at 05:55 PM

Post a comment

Comments are moderated and will not appear until the moderator has approved them.

If you have a TypeKey or TypePad account, please Sign in

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

December 2, 2010 in Deflation, Federal Reserve and Monetary Policy, Monetary Policy | Permalink


TrackBack URL for this entry:

Listed below are links to blogs that reference What might monetary policy success look like?:



How did you create the latter figure? 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.

Posted by: David Beckworth | December 03, 2010 at 09:32 AM

Clearly the Fed has little or no understanding of the economy, as demonstrated by their total failure to see(let alone counteract) the massive debt bubble and resulting financial crisis that afflicted (and still afflicts) the US. This is not to malign their possible good intentions but simply reflects the reality of a complex and inherently unpredictable process. Why then should they be asking themselves what success looks like, since they couldn't even recognize failure until it bit them in the ass? And even if they did brand some event as 'success', how could we ever know (until much later) that it was really so?

The answer is obvious - they shouldn't even try. Let the market figure out interest rates - it does a much better job.

Posted by: John Smith | December 08, 2010 at 08:14 PM

Mr. Altig,

One matter that I am sure you have thought about, though didn't expressly mention in this posting is what the success of the quantitative easing programs would look like. To the best of my knowledge the goal of QEII is to shift capital market participants further out on the risk curve with the intent of causing a positive impact to the real economy i.e. increasing employment. However, I have recently been theorizing about the implications of globalization of finance and how it might actually be preventing this monetary policy from working. Who at the Federal Reserve, that you might know of, is thinking about this issue? If you observe fund flows data, it isn't hard to see capital shifting out on the risk curve (cash to bonds, bonds to equities, and theoretically equities to real investments, etc.) BUT the vast majority of this shift is occurring outside of the United States and in particular emerging markets. It appears that the freedom of capital to flow with relative ease from country to country might actually be circumventing the Fed's actions from working. If this were true, in effect the Federal Reserve would be incentivizing employment every where else but the United States. Without isolating the capital mandated to remain within the United States QEII seems to be, at best, steralized in terms of its ability to improve the US economy...and at worst it is counter productive.

Another question/thought I have had...who at the Federal Reserve has considered that if investment capital remains at a fixed mandate for risk tolerance...as investors are forced out on the risk curve they are in essence utilizing less and less capital (due to structural mandates to remain within a preset risk tolerance level) which in theory implies the further out on the curve they go...the less fire power there is to heal the real economy.

Could you please provide me with any feedback or thoughts you would have about these views. Thanks for your time.


Posted by: Danny | December 09, 2010 at 03:24 PM

I appreciate that David Altig and colleagues, like members of any organisation, have to ask the questions like “What would successful achievement of the tasks given us look like?”

But I think that in the case of the Fed, this is like a bunch of people given the task of making better bows and arrows during World War I asking a similar question. The latter hypothetical people have been given a silly task.

As any number of economists have pointed out, the Fed’s quantitative easing efforts have now descended to farce. That is, QE2 may reduce interest rates from 0.5% to 0.3%. Does anyone seriously think that will do any good? Plus there is Danny’s point above about most of the extra money flowing out of the U.S.

I suggest that what has gone wrong is the separation of fiscal and monetary policy, and to an extent that the great economists never envisaged. Keynes and Abba Lerner certainly though the two should be merged. And Milton Friedman in his 1948 American Economic Review paper argued likewise: see http://nb.vse.cz/~BARTONP/mae911/friedman.pdf

Merging fiscal and monetary does NOT mean the end of independent central banks (CBs): it just involves a slight change in the rules governing the relationship between CBs and treasuries. For example, when the CB thinks extra spending is warranted because of subdued inflation and excess unemployment, the CB says to government “You can spend more and/or reduce taxes, and do it any way you like. That’s a political question. Our task is purely to optimise the inflation unemployment relationship.”

If over the last year or so the Fed, instead of printing extra money so as to fund QE, had channelled the money to Congress, who in turn let’s say channelled it into the pockets of Main Street (e.g. via a payroll tax reduction), the stimulatory effect would have been ten times larger, plus more of the stimulus would have been confined to the U.S.

Posted by: Ralph Musgrave | December 12, 2010 at 03:52 PM

David Beckworth@December 03, 2010 at 09:32 AM: "How did you create the latter figure? Using the Fed's own constant maturities series (for both the nominal and real yield), the figure I come up with is less impressive."

Judging from the caption "5-yr/5-yr Forward Breakeven Inflation Rates", the latter figure in this post seems to describe expected inflation between 2015 and 2020, whereas Prof. Beckworth described expected inflation between 2010 and 2015 (=spot BEI).

Posted by: himaginary | December 14, 2010 at 07:04 AM

The Federal Reserve's objectives - its dual mandate, set by Congress - are to promote a high level of employment and low, stable inflation. Unfortunately, the job market remains quite weak; the national unemployment rate is nearly 10 percent, a large number of people can find only part-time work, and a substantial fraction of the unemployed have been out of work six months or longer. The heavy costs of unemployment include intense strains on family finances, more foreclosures and the loss of job skills.

Posted by: Traduceri | December 28, 2010 at 05:46 AM

Post a comment

Comments are moderated and will not appear until the moderator has approved them.

If you have a TypeKey or TypePad account, please Sign in

July 09, 2010

How close to deflation are we? Perhaps just a little closer than you thought

Since last October, the consumer price index (CPI) has gone up an annualized 0.7 percent. On an ex-food and energy basis, the number is a little lower, at 0.5 percent. And the Cleveland Fed's trimmed-mean and median CPIs, at 0.7 percent and 0.2 percent, respectively, also put the recent trend in consumer prices in pretty low territory.

And this is before we take into account any potential mismeasurement, or "bias," in the construction of the CPI.

How big is the CPI's bias? Well, in 1996, the Social Security Administration commissioned a study on the accuracy of the CPI as a measure of the cost of living. This so-called "Boskin Commission Report" said the CPI was overstated by about 1.1 percentage points per year. The commission identified several sources of potential bias, but about half of the 1.1 percentage points resulted from new products and quality changes that were slow or otherwise imperfectly introduced into the price statistic.

Since that time, the Bureau of Labor Statistics has initiated a number of methodological changes that have reduced the CPI's mismeasurement. In a 2001 paper, Federal Reserve Board economists David Lebow and Jeremy Rudd put the CPI bias at only about 0.6 percentage points. And again, of this amount, the big share of the bias (about 0.4 percentage points) resulted from the imperfect accounting of new and improved goods.

Now, in an article (available to all in its working paper version) appearing in the latest issue of the American Economic Review, Christian Broda and David Weinstein say the earlier estimates of the new goods/quality bias may be a bit understated. The authors examine prices from the AC Nielsen Homescan database and conclude that between 1996 and 2003, new and improved goods biased the CPI, on average, by about 0.8 percentage points per year. If this estimate is accurate, consumer price increases since last October would actually be around zero, or even slightly negative, once we account for the mismeasurement of the CPI caused by new and improved goods.

But (oh, you just knew there was going to be a "but" in here, right?) the authors also point out that, because new goods are introduced procyclically, this bias tends to be larger during expansions and smaller during recessions. In other words, given the severity of the recession and the modest pace of the recovery, there may not be a whole lot of innovation going on right now in consumer goods. This is a bad thing for consumers, of course, but it would be a good thing for the accuracy of the CPI.

By Mike Bryan, vice president and senior economist at the Atlanta Fed

July 9, 2010 in Deflation, Inflation | Permalink


TrackBack URL for this entry:

Listed below are links to blogs that reference How close to deflation are we? Perhaps just a little closer than you thought:


This study is good, and should displace many of the big numbers floating around.

But it does not look at the even bigger problem that the CPI home owners equivalent rent probably significantly understates home prices increases over the last 30 years.

Posted by: spencer | July 09, 2010 at 05:28 PM

Changes in the economy of the upcoming dimension are impossible to not see.

Contrary to economic theory and Nobel Laureate Milton Friedman, monetary lags are not "long & variable". The lags for monetary flows (MVt), i.e., the proxies for (1) real-growth, and for (2) inflation indices, are historically, always, fixed in length.

It is an incontrovertible fact (as it now stands), that nominal gDp will cascade through-out the 4th qtr (down in every month - Oct, Nov, & Dec). And without a slingshot (added monetary & fiscal intervention/stimulus), the economy will never "reach escape velocity".

Stocks will crash by Oct. - at the latest. They will probably correct back to the right shoulder at 6,547. The bottom for this depression is in July 2011. The DOW will bottom c. 3,300.

Posted by: flow5 | July 11, 2010 at 02:43 PM

The idea that the CPI overstates inflation is open to interpretation. Various statistical measures may be applied to show that the CPI does in fact overstate the inflation rate. However, the way the CPI measures inflation is in stark contrast to the perceived value consumers place on the goods and services they purchase. If for instance a new automobile has added one new feature over last years model of that same vehicle and the added worth to that vehicle is $500, and this new feature is standard for the new model, and the price to the consumer for the new model is only up by $200; then the CPI would say that in this case not only was there no inflation, but there was deflation that took place. The consumer purchases the new vehicle thinking that he paid $200 more than he would have paid for last years model and that inflation in this case had risen for the new vehicle. So he pays more for the new vehicle that came with an added feature that came standard (meaning he had no choice on the added feature)and is told by CPI standards that he actually paid $300 less than his actual cost outlay.
This may sound reasonable to an economist, but not to the average consumer.

Posted by: JRB | July 15, 2010 at 10:53 AM

"This may sound reasonable to an economist, but not to the average consumer."

Ya but this is not typically what happens. Usually prices stay constant and features increase or sometimes prices even fall and features increase. I remember buying my 1998 Corolla for more than the current 2010 Corolla and with fewer features. Additionally I know that the quality has improved.

Its obvious this is deflation. In fact its gotten to the point that I try to delay purchases as long as possible because I know the later I buy the higher the quality, the lower the price and the greater the features.

Posted by: assman | July 16, 2010 at 09:21 AM

Hey, what happened to the post on the Beveridge curve? I was going to leave a comment, but it disappeared.

Part of the comment is relevant to this post though: since Beveridge curve shifts are correlated with Phillips curve shifts, if the latest observation really represents a shift, then it may mean we are not as close to deflation as I thought (but I thought we were pretty damn close, even before reading this post). 4 years ago, I never would have thought that an increase in the NAIRU could be good news, but under the circumstances, it might be.

Posted by: Andy Harless | July 16, 2010 at 11:20 AM

The problem in this analysis, of course, is that the CPI is underweight in THE THINGS THAT PEOPLE MUST BUY.

So for me, comfortably middle class, the CPI is probably high. For people who struggle, it is low. The fact that my eventual heart bypass surgery will be a technological marvel will be small consolation for the family of four that barely misses qualifying for public assistance.

Posted by: Robert in Phoenix | July 17, 2010 at 08:34 PM

Post a comment

Comments are moderated and will not appear until the moderator has approved them.

If you have a TypeKey or TypePad account, please Sign in

Google Search

Recent Posts



Powered by TypePad