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The Outlook for Inflation

The Outlook for Inflation. Edward S. Knotek II Vice President of Economic Forecasting. Disclaimer. The views expressed today are my own and not necessarily those of the Federal Reserve Bank of Cleveland or the Federal Reserve System. Key Themes.

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The Outlook for Inflation

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  1. The Outlook for Inflation Edward S. Knotek II Vice President of Economic Forecasting

  2. Disclaimer The views expressed today are my own and not necessarily those of the Federal Reserve Bank of Cleveland or the Federal Reserve System.

  3. Key Themes • Inflation has been running at very low levels … • … but recent readings have moved higher, suggesting inflation has bottomed out. • Stable inflation expectations and an improving economy will gradually pull inflation up to 2 percent over the next few years.

  4. Inflation has slowed since 2011 Year-over-year percent change FOMC’s longer-run objective PCE price index Core PCE price index Source: Bureau of Economic Analysis

  5. Accounting for the Recent Decline in Inflation Source: “Inflation: Why It Is Very Low, and Why It Matters” Federal Reserve Bank of Cleveland Annual Report 2013

  6. Monthly inflation readings have perked up Month-over-month percent change Median CPI Source: Federal Reserve Bank of Cleveland

  7. Monthly inflation readings have perked up Month-over-month percent change PCE price index Median CPI Core PCE price index Source: Bureau of Economic Analysis, FRB-Cleveland

  8. Monthly inflation readings have perked up Month-over-month percent change PCE price index Median CPI Core PCE price index Nowcasts from Inflation Central Source: Bureau of Economic Analysis, FRB-Cleveland

  9. Food inflation is part of the story Month-over-month percent change CPI: Food price index Source: Bureau of Labor Statistics

  10. Commodity prices are already leveling off Index, 1967=100 Reuters/Jefferies CRB Commodities futures Source: Commodity Research Bureau/Haver Analytics

  11. Services inflation remains subdued Year-over-year percent change PCE core services price index Source: Bureau of Economic Analysis

  12. Services inflation remains subdued Year-over-year percent change Employment cost index PCE core services price index Source: Bureau of Economic Analysis, Bureau of Labor Statistics

  13. Inflation is expected to gradually rise Year-over-year percent change PCE price index (data) Forecast Source: Bureau of Economic Analysis, FRB-Cleveland

  14. Key Drivers of the Forecast • Stable inflation expectations • An improving economy and tightening labor markets that lift wage growth • Winding down of special temporary factors but still some low inflationary momentum • Moderate pressure from commodity prices

  15. Inflation forecasts are very uncertain Year-over-year percent change PCE price index (data) 70 percent probability band Source: Bureau of Economic Analysis, FRB-Cleveland

  16. Risks and Uncertainties • Geopolitical uncertainties surround key energy and agricultural resources • Wages: muted or poised for a pickup? • Low inflation per se poses a risk to the outlook

  17. www.clevelandfed.org/inflation-central/

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