Survey Measures of Inflation Expectations
The annual inflation level as measured by the CPI was 1.8 percent as of November 2012, whereas the CPI excluding food and energy, usually referred to as the “core CPI,” was 1.9 percent. These latest figures, along with developments over the past year, show that the inflation scare of recent years has yet to be supported by the data.
To shed light on the future pace of inflation, we present survey results on inflation expectations. Inflation expectations reflect what economic agents think about the inflation outlook. Survey measures of inflation expectations are one of the most successful predictors of future inflation (see this Commentary for more detail). The surveys that we report are the University of Michigan’s Survey of Consumer Attitudes and Behavior (UM Survey) and the Philadelphia Fed’s Survey of Professional Forecasters (SPF). The UM Survey does not specify a particular measure of inflation for its questions on inflation expectations, whereas professional forecasters are asked their opinions specifically on the CPI and the core CPI. The UM Survey is monthly, and the SPF is quarterly. The most recent UM survey was released in December, and the most recent SPF was released in November for 2012:4.
One-year inflation expectations from the UM Survey were at or above 3 percent in every month of 2012. They spiked in March at 3.9 percent and then in August at 3.6 percent. Note that energy prices were rising relatively rapidly at these times. Since August though, UM expectations have hovered between 3.1 percent and 3.3 percent, and they ended the year at 3.2 percent. On the other hand, SPF expectations for one-year inflation expectations were much more stable over 2012. One-year expectations for the CPI varied between 2.07 percent in the first quarter and 2.19 percent in the fourth. Similar ranges were reported for the core CPI (1.92 percent in the first quarter and 2.02 percent in the third). As of November, SPF expectations point to an annual inflation level of around 2 percent (2.19 percent for the CPI and 1.98 percent for the core CPI).
The SPF survey also asks respondents to assign probabilities to particular ranges of the current and next year’s annual core CPI inflation rate. We report the mean of their probabilities for 2013. The 1.5-1.9 percent range and the 2.0-2.4 ranges are the two most likely outcomes anticipated for annual core CPI inflation. These two ranges receive about 68.6 percent of the probability from the SPF respondents (each with about 34.3 percent probability).
Both the median figures for the CPI and the probabilities for different ranges of the core CPI point to a level of inflation that is consistent with (if not a little lower than) the Fed’s medium-term target of 2 percent inflation. On the other hand, the UM Survey points to a higher level of inflation, but notice that in the last four years this measure is almost always higher than the SPF measures.
Finally, we check long-term inflation expectations. Both UM (5- to 10-year) and SPF (5-year and 10-year) expectations were quite stable over 2012. The former hovered between 2.7 percent and 3 percent, ending the year at 2.9 percent. The 5-year SPF expectation fluctuated between 2.2 percent and 2.3 percent and ended the year at 2.28 percent. Ten-year SPF expectations ranged between 2.3 percent and 2.48 percent. These data support the claim of anchored long-term inflation expectations.