FREE NEWSLETTER: Econintersect sends a nightly newsletter highlighting news events of the day, and providing a summary of new articles posted on the website. Econintersect will not sell or pass your email address to others per our privacy policy. You can cancel this subscription at any time by selecting the unsubscribing link in the footer of each email.

posted on 04 October 2015

Survey And Market Measures Of Inflation Expectations

from the Cleveland Fed

-- this post authored by Sara Millington and Mehmet Pasaogullari

Inflation has been rising this year, but the overall increase appears to be small. The year-over-year change in the Consumer Price Index (CPI) is 0.2 percent (as of August 2015), while the core CPI (which removes volatile food and energy prices) has risen between 1.6 and 1.8 percent throughout the year. In this article, we review several measures of inflation expectations, which reflect economic agents' perceptions about the future course of inflation.

One-Year Change in CPI and Core CPI

We look at two kinds of measures, expectations reported in surveys and expectations derived from financial markets. For survey expectations we consider the University of Michigan Survey of Consumers (UM Survey) and the Federal Reserve Bank of Philadelphia's Survey of Professional Forecasters (SPF). The former is conducted monthly, and the latter quarterly. The market measures of inflation expectations that we look at include the TIPS breakeven inflation rate and the inflation swaps rate, both of which are available at a daily frequency.

Survey Measures

Overall, surveys show that short-term inflation expectations have increased recently, but the increase has been limited. The UM Survey's 1-year median inflation expectation has risen over the last six months, going from 2.6 percent to 2.9 percent (April to September). Similarly, the SPF 1-year median expectation has risen in the last two surveys, increasing about 0.1 percentage points for the CPI and 0.2 percentage points for the core CPI. As of 2015:Q3, SPF survey participants expect CPI and core CPI inflation to be 2 percent in one year.

Inflation Expectations, One-Year Ahead

The upside risks to the core CPI inflation outlook for the end of 2015 and for 2016 seem more pronounced than before, judging from the SPF. The most likely outcome for the 12-month change in the core CPI at the end of 2015:Q4 is still in the 1.5 to 2.0 percent range, but the probability of it falling in the 2.0 to 2.5 percent range is a close second at 34 percent, which has almost doubled in the last two surveys. In contrast, the odds for the 1.0 to 1.5 percent range declined more than 13 percent, and now this range is the third-most likely outcome. The same trend is also seen for the 2016:Q4 outcomes, for which the 2.0 to 2.5 percent range is currently viewed as the most likely.

SPF Core CPI Probabilities, 2015:Q4

SPF Core CPI Probabilities, 2016:Q4

Meanwhile, long-term inflation expectations have been quite stable in 2015 according to the surveys. The UM Survey's 5-to-10-year inflation expectation has bounced back and forth in a narrow band of 2.6 to 2.8 percent this year and is currently at 2.8 percent (as of September 2015, preliminary result). The SPF 5-year CPI inflation expectation has remained at 2.0 percent since falling there in the first survey of 2015. The 10-year SPF increased only by 0.05 percentage points in the last two surveys; it is 2.15 percent in the recent survey.

Long-Term Inflation Expectations from Surveys

Market Measures

Market measures of long-term inflation expectations have been volatile in the last six months, especially in the most recent period. Between mid-March and early July, the 10-year inflation swap rate increased by about 30 basis points to 2.16 percent, whereas the 10-year TIPS breakeven rate rose by 27 basis points to 1.91 percent. However, from then until August 24, both measures declined steadily. On August 24, 2015, the TIPS breakeven rate was 1.49 percent, its lowest level since May 2009, and the 10-year inflation swap rate was 1.73 percent, its lowest level since January 2009.

Long-Term Inflation Expectations from Market Measures

One thing to keep in mind when looking at market expectations is that they are not reflections of pure inflation expectations. They also reflect inflation and liquidity premiums, and the fact that financial markets have been quite volatile recently may have affected these premiums. On the same day these swap and breakeven rates were reported, August 24, US stock market indexes declined by about 4 percent, suggesting that the market measures' low levels of inflation expectations reflect more than just a deterioration of market perceptions for the long-term inflation outlook. Since then, these measures have continued their volatile pattern. As of September 10, the 10-year TIPS breakeven rate was 1.59 percent, and the inflation swap rate was 1.84 percent.

Bottom Line

There has been a limited rise in short-term inflation expectations. Long-term inflation expectations are either rising slightly or falling quite a bit, depending on the measure consulted. Survey measures suggest that long-term inflation expectations have been largely stable or increasing only slightly over the last six months. In contrast, market measures of long-term expectations showed large declines recently, possibly due to liquidity and inflation premiums among other things.

>>>>> Scroll down to view and make comments <<<<<<

Click here for Historical News Post Listing

Make a Comment

Econintersect wants your comments, data and opinion on the articles posted.  As the internet is a "war zone" of trolls, hackers and spammers - Econintersect must balance its defences against ease of commenting.  We have joined with Livefyre to manage our comment streams.

To comment, using Livefyre just click the "Sign In" button at the top-left corner of the comment box below. You can create a commenting account using your favorite social network such as Twitter, Facebook, Google+, LinkedIn or Open ID - or open a Livefyre account using your email address.

You can also comment using Facebook directly using he comment block below.

Econintersect Contributors


Print this page or create a PDF file of this page
Print Friendly and PDF

The growing use of ad blocking software is creating a shortfall in covering our fixed expenses. Please consider a donation to Econintersect to allow continuing output of quality and balanced financial and economic news and analysis.

Take a look at what is going on inside of
Main Home
Analysis Blog
Joan Robinson’s Critique of Marginal Utility Theory
The Truth About Trade Agreements - and Why We Need Them
News Blog
Heavy Metal And Hard Rock Albums That Went Certified Diamond Status
Down The Drain: Wastewater With The Most Cocaine
Apple's App Store Set For 5 Million Apps By 2020
How Can The UK Government Meet Its Legal Air Pollution Targets?
Most Gun Deaths In The United States Have A Tragic Motive
What We Read Today 08 December 2016
Five Mysterious Space Diseases That Could Kill Astronauts Before They Get To Mars
03 December 2016 Initial Unemployment Claims Rolling Average Insignificantly Worsens
November 2016 CBO Monthly Budget Review: Down by 3 Percent in the First Two Months of Fiscal Year 2017
Putting Grassroots Terrorism In The Proper Perspective
Crude Oil Prices: "Random"? Hardly. The More Emotional The Market, The More Predictable It Is.
Infographic Of The Day: Job-Hopping
Early Headlines: Asia Stocks Up, Oil Firms, Russia's Big Oil Deal, Trump Will Stay In Business, Trump Menaces Drug Cos, Banks Rig Silver, Italy's 360B NPL, Iraq Has Oil Cut Problem, China Trade Improves And More
Investing Blog
Are Your Trade Entries Patient Enough? Technical Summary 08 December 2016
Opinion Blog
Looking At Everything: Trump's $1 Trillion Infrastructure Plan
The Global Financial Mess Is Due To Political Failure
Precious Metals Blog
Silver Prices Rebounded Today: Where They Are Headed
Live Markets
08Dec2016 Market Close: Wall Street Closes Higher, But Not Without Pause For Indicators That Spell CAUTION In Capital Letters
Amazon Books & More

.... and keep up with economic news using our dynamic economic newspapers with the largest international coverage on the internet
Asia / Pacific
Middle East / Africa
USA Government

Crowdfunding ....



Analysis Blog
News Blog
Investing Blog
Opinion Blog
Precious Metals Blog
Markets Blog
Video of the Day


Asia / Pacific
Middle East / Africa
USA Government

RSS Feeds / Social Media

Combined Econintersect Feed

Free Newsletter

Marketplace - Books & More

Economic Forecast

Content Contribution



  Top Economics Site Contributor TalkMarkets Contributor Finance Blogs Free PageRank Checker Active Search Results Google+

This Web Page by Steven Hansen ---- Copyright 2010 - 2016 Econintersect LLC - all rights reserved