Inflation Will Be In Focus At Fed Chair Powell’s Testimony In Congress This Week
Sticky inflation risk is expected to be a central talking point when Federal Reserve Chairman Jerome Powell testifies this week in the Senate (Tues., Feb. 11) and House (Wed., Feb. 12).
Sticky inflation risk is expected to be a central talking point when Federal Reserve Chairman Jerome Powell testifies this week in the Senate (Tues., Feb. 11) and House (Wed., Feb. 12). Although the worst of the pandemic-related inflation has been tamed, progress has stalled recently. Headline and core readings of the consumer price index (CPI) have remained relatively steady near the 3% mark—above the Fed’s 2% inflation target.
More of the same is expected for this week’s CPI report for January (Wed., Feb. 12) with inflation remaining sticky at a roughly 3% pace.
TMC Research runs inflation analytics on multiple dimensions and for the moment the outlook remains mixed, depending on the indicator. The main takeaway: sticky inflation continues to lurk, but only moderately so, based on our analysis of several indicators. For example, monitoring inflation’s persistence via the spread for rolling 1-year CPI less core CPI still reflects a moderate disinflationary bias (i.e., a negative reading, per the chart below). But the persistence of the disinflationary bias appears to have faded recently.
A bit more concerning is the Cleveland Fed’s inflation expectations model, which offers an ex ante view. This model suggests that the inflation outlook continued to edge higher in January (see chart below). Separately, consumer sentiment data for early February shows that “many consumers appear worried that high inflation will return within the next year,” says the survey’s director for the University of Michigan’s latest report. “This is only the fifth time in 14 years we have seen such a large one-month rise (one percentage point or more) in year-ahead inflation expectations.”
On a somewhat more encouraging note, a purely markets-based measure of inflation expectations suggests the longer-run outlook has increased recently but remains relatively subdued at just above the Fed’s 2% target via five-year inflation expectations, based on two models. One model uses the 5-year/5-year forward expectation rate, calculated by the St. Louis Fed. The second model uses the implied market forecast according to the 5-year nominal Treasury yield less its inflation-indexed counterpart. The average of these two models has held steady lately at 2.4%-plus after rising in previous months. A key objective for the Fed is keeping longer-run inflation expectations steady and close to its 2% target to minimize the risk that higher inflation assumptions turn into a self-fulfilling prophecy. The ex ante estimates provide benchmarks for assessing success and failure on this crucial task.
Finally, the average of a set of alternative and conventional inflation indicators suggest the Fed has more work to do to contain/reduce inflation.
Using a wider set of consumer inflation metrics (published by regional Fed banks) shows that inflationary momentum is still reviving. The average rate of 1-year inflation for this alternative set of inflation yardsticks edged higher for a third straight month in December to 2.4%. That’s a sign that pricing pressure may be reheating, in which case the Fed may be pressured into raising interest rates again.
Read a pdf version of this article:
