There’s a lot to digest in Yellen’s latest speech on inflation, but for now just focus on the contrast between this (emphasis ours):
The evidence suggests that inflation expectations are in fact well anchored at present. Figure 7 plots the two survey measures of longer-term expected inflation I presented earlier, along with a measure of longer-term inflation compensation derived as the difference between yields on nominal Treasury securities and inflation-indexed ones, called TIPS. Since the late 1990s, survey measures of longer-term inflation expectations have been quite stable; this stability has persisted in recent years despite a deep recession and concerns expressed by some observers regarding the potential inflationary effects of unconventional monetary policy. The fact that these survey measures appear to have remained anchored at about the same levels that prevailed prior to the recession suggests that, once the economy has returned to full employment (and absent any other shocks), core inflation should return to its pre-recession average level of about 2 percent. Read more
Many economists think the government can help a weak economy by convincing people the rate of price increases is poised to accelerate. In theory, households will spend more whilst businesses will boost their hiring and investment.
New research presented at the Brookings Panel on Economic Activity, which we attended, suggests this is mostly nonsense. A detailed survey of business executives in New Zealand suggests inflation expectations have basically no direct impact on the way companies make decisions. (Inflation expectations could affect how banks and capital markets charge firms for funding, but that’s an indirect effect.)
When asked what they would do if they learned prices would increase more over the next year than they were currently expecting, 65 per cent of managers wouldn’t raise prices, 75 per cent wouldn’t raise wages, 73 per cent wouldn’t increase employment, and 71 per cent wouldn’t increase investment. Read more
Any observed statistical regularity will tend to collapse once pressure is placed upon it for control purposes.
–Charles Goodhart, 1975 Read more
The Fed’s balance sheet is no longer in expansion mode, which means it’s time for post-mortems of the most recent asset purchase programme. (Our colleague John Authers has a very good round-up of what did and didn’t happen since QE3 began.)
We want to focus on the fact that the most recent round of bond-buying seemed to have no inflationary impact. If anything, an observer of the data who had no preconceptions about monetary policy operations would conclude that QE3 was disinflationary. Alphaville writers have been exploring this possibility for years (though without firm conclusions).
Let’s start by looking at the changes in actual inflation since the start of 2010. Read more
“Mad. Mad. Mad. Bernanke’s gone totally MAD, I tell you!”
“What’s he thinking with QEternity? It’s so inflationary. AGHH!” Read more
Market expectations for US inflation have dropped to their lowest level in a year and are now below the Federal Reserve’s unofficial target, as investors respond to the central bank’s latest attempt to stimulate the economy, the FT reports. The expected rate of inflation over the next 30 years, as measured by the difference between Treasury Inflation Protected Securities, Tips, and cash government bonds, dropped as low as 1.85 per cent in recent days from 2.73 per cent since last month. The rate was just under 2 per cent on Tuesday. The drop in long-term inflation expectations came after the Fed announced Operation Twistlast week, a policy aimed at driving down long-term interest rates. So far it has not approached the lows of summer 2010, when investors feared the economy was in danger of tipping into deflation.
To our inbox this morning came a note from RBC arguing that the FOMC statement last week acted as a kind of “Anti-Stimulus”.
Here’s the explanation: Read more
On Friday there was an intra-Economist discussion between Free Exchange and Buttonwood about inflation expectations, a topic that’s an old favourite of ours.
At issue was Buttonwood’s use of the latest University of Michigan consumer sentiment survey to argue that inflation expectations have been climbing in the US. The survey’s findings contradict the conventional market-based measures of inflation expectations, which Free Exchange prefers and which have been falling. Read more
Here’s an interesting graphic from Nomura’s fixed income team for bubble addicts.
It shows the pain thresholds for QE3. Read more
The importance of inflation expectations to central bank policy is well-understood.
Equally well-known is that there are different, sometimes conflicting measures of these expectations. Surveys of households will show different expectations than surveys of professional economists, and markets-derived inflation expectations (from inflation-indexed debt and the like) will show different results than these survey-based measures. Such subtleties as how a question is framed can change the result. Read more
Morgan Stanley was burned by a wager on US inflation expectations, Bloomberg reports, citing people familiar. The bank’s interest-rates trading group lost at least tens of millions of dollars on the trade, which the firm is now unwinding. Traders at the bank bet that inflation expectations for the next five years would rise in US Treasury markets, while forecasts for the next 30 years would fall. Such wagers on so-called breakeven rates involve paired purchases and short sales of USTs and TIPS, in both maturities. Zero Hedge explains that the recent fall in crude oil prices disproportionately hurt the value of TIPS.
The Bank of England governor is a rule-breaker, just like Argentinian football star Diego Maradona.
So says Malcolm Barr over at JPMorgan: Read more
Ahead of tomorrow’s FOMC statement and press conference, your (US) inflation graphs du jour:
Don’t get us wrong — what you see below doesn’t mollify our concerns about the Federal Reserve’s explanation for why commodity price rises will moderate.
But, courtesy of the NY Fed’s new blog, these graphs do shed some light on how the doves on the FOMC think about inflation expectations: Read more
Analysts, it seems, are indefatigable on the subject of inflation expectations these days.
Not that we blame them — we’ve contributed to the cacophony of opinions. And since it’s inflation week here in the US, culminating tomorrow morning with the March CPI numbers, we’ll pass along two more notes on the subject from earlier today. Read more
Given the attention that inflation expectations received in Tuesday’s release of the latest FOMC minutes, we’re not the least bit surprised that it’s been the topic du jour among analysts (along with other distractions).
We’ll get to them in a moment, but first, here is the key paragraph from the minutes: Read more
Some grumbling from the belly of the US Treasury curve.
US Treasuries had a rollercoaster day on Wednesday as soaring crude sent the 10-year yield lower by 6 basis points. UST gains then reversed within a couple of hours. Meanwhile five-year breakeven rates (the spread between inflation-linked and regular US debt notes) rose to the highest since July 2008 on inflation concerns. Read more
Time to unburden ourselves of a long-withheld complaint ahead of this Thursday’s release of the January CPI numbers.
Here’s a chart comparing 12-month inflation expectations in the Reuters/University of Michigan consumer confidence survey (updated last Friday) against actual 12-month changes in the CPI (both headline and core): Read more
As Nicolas Sarkozy has noticed, worries about global inflation have picked up in the first weeks of 2011.
And according to two notes out on Monday this is not just down to rising commodity prices; there is also a lack of spare capacity that is being reflected in rising core inflation and increased expectations. Read more
The latest chart porn out of the Atlanta Fed:
The CPI numbers for October are out from the US Labor Department, with the monthly 0.2 per cent increase a bit lower than the expected 0.3 per cent.
But here’s the chart we usually focus on: Read more
Inbox jammed with the latest barrage of daily economic data points and previews?
Feeling overwhelmed at the prospect of wading through the reports and trying to figure out what the market consensus is? Read more