Keeping On Top Of Inflation

by: The Federal Reserve Bank of Atlanta

By Mike Bryan, Laurel Graefe, and Nicholas Parker

Where's inflation heading? Well, here's what the minutes of the December meeting of the Federal Open Market Committee (FOMC) had to say on the subject:

Participants observed that inflation had moderated in recent months as the effects of the earlier run-up in commodity prices subsided ... many participants judged that the moderate expansion in economic activity that they were projecting ... would be consistent with subdued inflation going forward.

But not all FOMC meeting participants viewed these trends with equanimity:

Indeed, some expressed the concern that, with the persistence of considerable resource slack, inflation might run below mandate consistent levels for some time.

According to Reuters, San Francisco Fed President John Williams said it this way:

The data so far on the inflation front are confirming my view that inflation is ebbing and moving to be too low, and that is an important driver of my thinking about policy.

But as you might expect, some see the inflation risks weighing a bit on the other side of the scale. Again, from the December FOMC meeting minutes:

Some participants were concerned that inflation could rise as the recovery continued ... A few participants argued that maintaining a highly accommodative stance of monetary policy over the medium run would erode the stability of inflation expectations.

In fact, Philadelphia Fed President Charles Plosser had this to say in a speech earlier this week:

I do anticipate that with many commodity prices now leveling off or falling, and inflation expectations relatively stable, inflation will moderate in the near term ...

But as a policymaker, my focus is less on the near term and more on the medium term. Looking further ahead, I believe we must monitor the inflation situation very carefully, particularly in this environment of very accommodative monetary policy. Inflation most often develops gradually, and if monetary policy waits too long to respond, it can be very costly to correct. Measures of slack such as the unemployment rate are often thought to prevent inflation from rising. But that did not turn out to be true in the 1970s. Thus, we need to proceed with caution as to the degree of monetary accommodation we supply to the economy.

What doesn't seem to be in dispute is that monitoring the data for any sign that the inflation trend is shifting—either higher or lower—is probably a good idea. And there are a lot of data to watch. In a speech last year to the Calhoun County Chamber of Commerce, Atlanta Fed President Dennis Lockhart had this to say about reading the inflation data:

To achieve price stability, policymakers must detect inflation in its early stages before it is firmly established, especially in the psychology of consumers and businesses. This early detection is a challenge because inflation is not easily measured in the short term with any precision. No single price statistic enjoys a sufficient vantage point from which to assess inflation in the short term. With imperfect tools, inflation is more easily monitored than precisely measured.

The research department of the Federal Reserve Bank of Atlanta has taken pretty seriously the task of monitoring inflation developments. Where there are gaps in our information, we've been working to fill them with data, and we've aggregated it all into one place: the Inflation Project web page.

On the Inflation Project, we now report a sticky-price CPI statistic calculated from consumer price index data using only those components whose prices are slow to change. Joint research with the Cleveland Fed has shown this measure to be helpful when thinking about inflation expectations. Using Treasury Inflation-Protected Securities data, we now produce a weekly measure of the probability of a sustained deflation. And come January 27, we'll begin reporting the results of a monthly survey of business inflation expectations that examines firms' price-setting environment and the pricing pressures they face. From the responses, we'll generate a monthly measure of respondents' year-ahead unit cost expectations.

But of course, there are already a lot of data to keep an eye on. To make it a little easier to gain some perspective, we're also unveiling our inflation dashboard. The dashboard provides a platform for visualizing some of the data we commonly monitor to keep abreast of emerging inflation developments. It tracks 30 data series grouped into six major categories—retail prices, inflation expectations, labor costs, producer prices, material and commodity costs, and money and credit.

Our data and the inflation dashboard are available on the Inflation Project web page. Let us know what you think.