Cleveland Fed looks at consumer spending; private fixed investment; and whether oil prices predict inflation
Personal consumption expenditures, which account for approximately 70 percent of GDP, have continued to grow despite modest and erratic income growth, high unemployment, higher taxes, and higher energy and food prices. Contributing to the consumer’s resiliency are strong financial asset market performance, recently improving housing market conditions, and a slowly improving labor market, says vice president and senior regional officer LaVaughn Henry. According to Henry, there have also been shifts in the types of things that households are consuming. Most notably, the consumption of durable goods – especially motor vehicles and parts – has picked up at a relatively faster pace than either nondurables or services.
When researcher Daniel Carroll looked at private fixed investment in late 2012, it appeared to have stalled. But Carroll says that since then, new data has been released and a new component has been added to GDP – intellectual property – and both of these developments have changed his view. Overall, private fixed investment now appears to have been recovering faster than GDP since 2010:Q4. And the new data show that residential investment rose substantially in 2013, after five years of mostly negative growth, compensating for weaker growth in nonresidential investment.
Some analysts pay particular attention to oil prices, thinking they might give an advance signal of changes in inflation. However, using a variety of statistical tests, researchers Mehmet Pasaogullari and Patricia Waiwood show that adding oil prices does little to improve forecasts of CPI inflation and does an even worse job at improving forecasts of core CPI inflation. Their results suggest that higher oil prices today do not necessarily signal higher CPI inflation next year, although they do help to explain short-term movements in the CPI.
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