Inflation expectations have an impact on one’s economic behavior. We show that the inflation expectations of professional forecasters and consumers are predicted by very different prices. While professional forecasters weigh prices similar to the consumer price index, consumers seem to focus on prices they see more often, such as those for food and new vehicles. These are also prices that have seen disproportionally high volatility since the onset of the pandemic. We argue that heterogeneity in the importance of component-specific inflation can have relevant economic implications and disproportionate effects on consumers’ inflation expectations that can, in turn, affect economic behavior.  Read More

Median and trimmed-mean inflation rates tend to be useful estimates of trend inflation over long periods, but they can exhibit persistent departures from the underlying trend over shorter horizons. In this Commentary, we document that the extent of this bias is related to the degree of skewness in the distribution of price changes. The shift in the skewness of the cross-sectional price-change distribution during the pandemic means that median PCE and trimmed-mean PCE inflation rates have recently been understating the trend in PCE inflation by about 15 and 35 basis points, respectively.  Read More

Surveys often measure consumers’ inflation expectations by asking directly about prices in general or overall inflation, concepts that may not be well-defined for some individuals. In this Economic Commentary, we propose a new, indirect way of measuring consumer inflation expectations: Given consumers’ expectations about developments in prices of goods and services during the next 12 months, we ask them how their incomes would have to change to make them equally well-off relative to their current situation such that they could buy the same amount of goods and services as they can today. Using a massive number of survey responses at a high frequency, we show that this measure of indirect consumer inflation expectations has risen sharply since early 2021. Higher inflation experiences correlate with higher indirect consumer inflation expectations across US cities and around the world.  Read More

This paper develops methods for the production and evaluation of censored density forecasts. The focus is on censored density forecasts that quantify forecast risks in a middle region of the density covering a specified probability, and ignore the magnitude but not the frequency of outlying observations. We propose a fixed-point algorithm that fits a potentially skewed and fat-tailed density to the inner observations, acknowledging that the outlying observations may be drawn from a different but unknown distribution. We also introduce a new test for calibration of censored density forecasts. An application using historical forecast errors from the Federal Reserve Board and the Monetary Policy Committee (MPC) at the Bank of England suggests that the use of censored density functions to represent the pattern of forecast errors results in much greater parameter stability than do uncensored densities. We illustrate the utility of censored density forecasts when quantifying forecast risks after shocks such as the global financial crisis and the COVID-19 pandemic and find that these outperform the official forecasts produced by the MPC.  Read More

Both theory and extant empirical evidence suggest that the cross-sectional asymmetry across disaggregated price indexes might be useful in the forecasting of aggregate inflation. Trimmed-mean inflation estimators have been shown to be useful devices for forecasting headline PCE inflation. But does this stem from their ability to signal the underlying trend, or does it mainly come from their implicit signaling of asymmetry (when included alongside headline PCE)? We address this question by augmenting a “hard to beat” benchmark inflation forecasting model of headline PCE price inflation with robust measures of trimmed-mean estimators of inflation (median PCE and trimmed-mean PCE) and robust measures of the cross-sectional asymmetry (Bowley skewness; Kelly skewness) computed using the 180+ components of the PCE price index. We also construct new trimmed-mean measures of goods and services PCE inflation and their accompanying robust skewness. Our results indicate significant gains in the point and density accuracy of PCE inflation forecasts over medium- and longer-term horizons, up through and including the COVID-19 pandemic. We find that improvements in accuracy stem mainly from the trend information implicit in trimmed-mean estimators, but that skewness is also useful. Median PCE slightly outperforms trimmed-mean PCE; both outperform core PCE. For point forecasts, Kelly skewness is preferred; but for estimating stochastic volatility, Bowley skewness is preferred. An examination of goods and services PCE inflation provides similar inference.  Read More

This paper focuses on the implications of alternative methods of aggregating individual wage data for the behavior of economy-wide wage growth. The analysis is motivated by evidence of significant heterogeneity in individual wage growth and its cyclicality. Because of this heterogeneity, the choice of aggregation will affect the properties of economy-wide wage growth measures. To assess the importance of this consideration, we provide a decomposition of wage growth into aggregation effects and composition effects and use the decomposition to compare growth in an average wage—specifically average hourly earnings—to a measure of average wage growth from the Survey of Income and Program Participation. We find that aggregation effects largely account for average hourly earnings growth being persistently lower and less cyclical than average wage growth over the period 1990-2015, with these effects reflecting a disproportionate weighting of high-earning workers. The analysis also indicates that composition effects now play a more limited role in the cyclicality of wage growth compared to results reported in previous studies for earlier time periods.  Read More