inflation expectations

Robin Harding

It’s interesting to note how much of decline in the Cleveland Fed’s measure of inflation expectations came before the latest round of market turmoil.

 

Rising inflation expectations might push Colombia’s central bank to raise rates from their record low. Minutes released today said that short-term expectations were in the upper half of their target range, while long-term expectations (5 to 10 years) “surpassed the ceiling of that range”. The bullish sentiment was tempered, however, by uncertainty:

The points [the members of the Board] stressed as being fundamental for an eventual hike in the intervention interest rate are, among others, growing upward inflation expectations above the target range, the important momentum in internal demand, high asset prices, and the accelerated build-up in lending.On the other hand, low core inflation levels and the recent relative stability in prices for non-tradable goods, excluding food and regulated items, the possible temporary nature of the increase in food prices, the unstable situation with respect to the sovereign debt of several European countries, and the lack of certainty surrounding the forecasts for inflation and growth in the months ahead were underscored as factors in favor of keeping the rate at its present level.

Almost half of leading economists believe the Bank of England has lost credibility in its inflation forecasts – a withering assessment of the central bank’s achievement of inflation control.

After the Bank persistently underestimated the strength of price pressures in the past three years, 34 out of 78 economists, or 44 per cent, said the credibility of its forecasts had been damaged by the inflationary overshoot. The most recent figure for inflation was 3.3 per cent in November, double the 1.5 per cent the Bank was forecasting as recently as February 2010. 

Robin Harding

The Cleveland Fed has updated its inflation expectations model after the release of the November CPI. It shows a tidy rise across all time horizons.

At the ten year horizon, inflation expectations rose to 1.64 per cent from 1.51 per cent, an improvement but still well below the 2 per cent that prevailed earlier this year when nominal yields were last at this level. The same holds true for 10yr TIPS spreads: 

James Politi

Conventional wisdom in Washington is that Ben Bernanke, Federal Reserve chairman, is pretty much alone in his quest to deliver a jolt to the US recovery.

With concerns about the deficit running rampant, Congress is unlikely to push through any significant fiscal stimulus anytime soon, particularly if there is a shift in power with strong Republican gains in the midterm congressional elections. As much as the Obama administration may want to move forward with new economic programmes, it is clearly hamstrung by the headwinds on Capitol Hill.

But not all may be lost…..

A research note by Michael Feroli, economist at JPMorgan, just highlighted some interesting ways in which fiscal policy could achieve what Charles Evans, president of the Federal Reserve Bank of Chicago, recently described as a crucial policy objective: lower short term real interest rates.