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The Outlook for Inflation
Edward S. Knotek II Vice President of Economic Forecasting
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Disclaimer The views expressed today are my own and not necessarily those of the Federal Reserve Bank of Cleveland or the Federal Reserve System.
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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.
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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
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Accounting for the Recent Decline in Inflation
Share of decline Source Subdued pace of recovery Pass-through from import prices, labor costs, energy prices Special, temporary factors Source: “Inflation: Why It Is Very Low, and Why It Matters” Federal Reserve Bank of Cleveland Annual Report 2013
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Monthly inflation readings have perked up
Month-over-month percent change Median CPI Source: Federal Reserve Bank of Cleveland
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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
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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
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Food inflation is part of the story
Month-over-month percent change CPI: Food price index Source: Bureau of Labor Statistics
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Commodity prices are already leveling off
Index, 1967=100 Reuters/Jefferies CRB Commodities futures Source: Commodity Research Bureau/Haver Analytics
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Services inflation remains subdued
Year-over-year percent change PCE core services price index Source: Bureau of Economic Analysis
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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
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Inflation is expected to gradually rise
Year-over-year percent change PCE price index (data) Forecast Source: Bureau of Economic Analysis, FRB-Cleveland
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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
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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
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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
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