We have updated our mixed-frequency Dynamic Factor Model (DFM) of “Common Inflation Expectations” (CIE) nowcast to include new readings from TIPS breakeven rates, and the newly released H2 numbers of the Livingston survey of the Federal Reserve Bank of Philadelphia. This is our final update for 2021:Q4. Next update will include 2022:Q1.
Results
Our model currently estimates that the Fed-CIE will move up again in 2021:Q4, following the upward tick in the third quarter. However, compared to last update, the upward tick in 2021:Q4 is smaller because breakeven rates have ticked down and because of today’s data (inflation over the next 10 years, measured by the CPI, in today’s Livingston survey was projected to be slightly lower than that projected six months ago, decreasing from 2.50 percent in the previous survey to 2.40 percent in the current survey).
We now estimate the level of the Fed CIE at 2.08 (2.06-2.10) in Q4.
The model is now running on a complete dataset for 2021:Q4; therefore, we will not update it again (technically, the Q4 number can change again due to breakeven data but at this point we do not expect the model to revise the nowcast substantially).
All told, we continue to estimate that the current level of inflation expectations is broadly consistent with a reading of core PCE price inflation of 2 percent.
Figures
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) nowcasts (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 for 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 level of the common factor cannot be interpreted because the underlying series are demeaned (in fact, normalized) at the beginning of estimation. 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.
Reminder: The Fed-CIE updates are posted at noon Eastern Time on the third Friday of the first month of each quarter (January, April, July, and October) for the previous quarter. The update for 2021:Q4 is expected on Jan 20th, 2022. Our model-based CIE nowcast is updated every time a new data becomes available.