Note to Macroblog Readers: It’s PPI day and Dave is letting me drive. Remember, these are my views, not his, and not those of the Cleveland Fed or the Federal Reserve Board of Governors. Michael F. Bryan
OK, we’ve got the first major inflation report of the year out of the way. The January Producer Price Index released this morning showed a 3 percent rise (annualized)—not so good. And once the volatile food and energy goods are stripped from the measure (the so-called “core” PPI), wholesale prices looked worse yet, posting a 4.7 percent increase—the index’s biggest gain in a year. What does it all mean? Not much, I think. The extreme monthly volatility of the PPI, and its rather narrow basket of goods, argues against putting any weight on the monthly PPI as an indicator of rising (or falling) inflation. And despite the intuitive appeal of the wholesale-then-retail inflation story, the PPI has never demonstrated a very useful track record as a leading indicator of retail inflation (as my colleague Todd Clark has demonstrated here.) If that weren't enough reason to be skeptical of the PPI report, I am especially wary of January PPI reports. It’s true that the BLS tries to filter out any seasonal patterns in wholesale price data but still, some “seasonality” seems to creep in. Over the past twenty years, the January core PPI has tended to be about 1 ¾ percentage points higher than other months, presumably as a disproportionate number of firms adjust their prices at the first of the year. Consider that on a year-to-year basis, the core component of the PPI actually slowed in January to a 1 ½ percent rate, continuing a moderation path that began about six months ago.
Also released this morning (but less widely reported) was the early February reading on household inflation expectations. The people at the University Michigan say that the year-ahead inflation expectations of households inched lower in early February to 3.7 percent (thank my colleague Linsey Molloy for the following slide.)
This is much improved from last fall when, in the wake of the twin hurricanes, near-term inflation expectations jumped to 5 ½ percent. Longer-term (5 to 10 years ahead) inflation expectations also softened in early February, to 3.3 percent, bringing household inflation sentiment back down to the levels they have held to over much of the past 10 years. What does it mean? Quite a lot, I think. Yes, there are a number of problems with using survey data to directly gauge the inflationary sentiment of households, and I hope to bring you some of that controversy at a later date. For those of you who just can’t wait, you can check out some of the recent work on this subject at a workshop sponsored by the Central Bank of Poland. Or mull over the peculiar demographic characteristics of these surveys, including the observation that women tend to hold persistently higher inflationary expectations than men. Still, the survey data offer us some reason to believe that the public is seeing the monthly gyrations in the price data for what they are—mostly noise—and their expectations for inflation would appear (to use the language of the FOMC) “well anchored.”