We have updated our mixed-frequency Dynamic Factor Model (DFM) of “Common Inflation Expectations” (CIE) to include new readings from the Michigan survey (final reading for October) and TIPS breakeven rates. Updated results are shown below.
Details. Our model currently estimates that the Fed-CIE will tick up again in 2021:Q4, following the upward tick in the third quarter. The increase is driven by the upward movement of breakeven rates which more than offset the downward tick in Michigan (5-10y, 75th pct). Crucially, we now estimate (see our latest update on trend models) that the current level of inflation expectations is consistent with a reading of core PCE price inflation of 2 percent (or slightly higher).
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) 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 Fed-CIE 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 next update for 2021:Q4 is expected on Jan 20th, 2022. Our model-based CIE nowcast can be updated at any point in time within each quarter.