1. The Outlook for Inflation
Edward S. Knotek II
Vice President of Economic Forecasting

2. Disclaimer
The views expressed today are my own and not necessarily those of the Federal Reserve Bank of Cleveland or the Federal Reserve System.

3. Key Themes Inflation has been running at very low levels …
… but recent readings have moved higher, suggesting inflation has bottomed out.
Stable inflation expectations and an improving economy will gradually pull inflation up to 2 percent over the next few years.

4. Inflation has slowed since 2011
Year-over-year percent change
FOMC’s
longer-run
objective
PCE price index
Core PCE price index
Source: Bureau of Economic Analysis

5. Accounting for the Recent Decline in Inflation
Share of decline
Source
Subdued pace of recovery
Pass-through from import prices, labor costs, energy prices
Special, temporary factors
Source: “Inflation: Why It Is Very Low, and Why It Matters”
Federal Reserve Bank of Cleveland Annual Report 2013

6. Monthly inflation readings have perked up
Month-over-month percent change
Median CPI
Source: Federal Reserve Bank of Cleveland

7. Monthly inflation readings have perked up
Month-over-month percent change
PCE price index
Median CPI
Core PCE price index
Source: Bureau of Economic Analysis, FRB-Cleveland

8. Monthly inflation readings have perked up
Month-over-month percent change
PCE price index
Median CPI
Core PCE price index
Nowcasts from
Inflation Central
Source: Bureau of Economic Analysis, FRB-Cleveland

9. Food inflation is part of the story
Month-over-month percent change
CPI: Food price index
Source: Bureau of Labor Statistics

10. Commodity prices are already leveling off
Index, 1967=100
Reuters/Jefferies CRB Commodities futures
Source: Commodity Research Bureau/Haver Analytics

11. Services inflation remains subdued
Year-over-year percent change
PCE core services price index
Source: Bureau of Economic Analysis

12. Services inflation remains subdued
Year-over-year percent change
Employment cost index
PCE core services price index
Source: Bureau of Economic Analysis, Bureau of Labor Statistics

13. Inflation is expected to gradually rise
Year-over-year percent change
PCE price index
(data)
Forecast
Source: Bureau of Economic Analysis, FRB-Cleveland

14. Key Drivers of the Forecast
Stable inflation expectations
An improving economy and tightening labor markets that lift wage growth
Winding down of special temporary factors but still some low inflationary momentum
Moderate pressure from commodity prices

15. Inflation forecasts are very uncertain
Year-over-year percent change
PCE price index
(data)
70 percent probability band
Source: Bureau of Economic Analysis, FRB-Cleveland

16. Risks and Uncertainties
Geopolitical uncertainties surround key energy and agricultural resources
Wages: muted or poised for a pickup?
Low inflation per se poses a risk to the outlook