Our model currently estimates that the Fed-CIE will move up again in 2021:Q4, following the upward tick in the third quarter. The increase is driven by the upward movement of breakeven rates and the upward movements of SPF. We estimate the level of the Fed CIE at 2.09 in Q4 (C.I. [2.06-2.11]). Few things can change again (we only have one reading of Michigan at the moment, we are missing the Livingston survey, and TIPS can move again) but overall, the Figure below should be pretty close to what the Fed staff might show to FOMC participants this round.
We now estimate that the current level of inflation expectations is consistent with a reading of core PCE price inflation of 2 percent.
Figure 1. Published Fed-CIE and our model-based nowcast
Note: the Figure shows the published Fed Common Inflation Expectations (CIE) index (the thick blue bar), and our Dynamic Factor Model (DFM) estimates (the black circles). Both series are displayed at quarterly frequency. The latest published quarter of the Fed-CIE is 2021:Q3. The latest circle in the Figure shows our nowcast of 2021:Q4. The dashed-blue lines are estimated confidence intervals. The Fed-CIE model is a DFM that includes 21 measures of inflation expectations. The estimated common factor (which is specified as an autoregressive process of order 4) is projected on a chosen measure of long-term inflation expectations (the SPF PCE 10 years). By construction, the absolute level of the estimated common factor cannot be interpreted because the underlying series are demeaned at the beginning of estimation given their different means. Instead, the level of the common factor can be compared to its own history. Our model is run only on the long-term measures of inflation expectations (8 in total) included in the Fed-CIE, given that these are the series driving the results.