New York Federal Reserve Building. Photo: Reuters/Keith Bedford
New York Federal Reserve Building. Photo: Reuters/Keith Bedford

I surveyed the last few months’ of Federal Reserve publications on the topic of inflation, or rather why there hasn’t been as much as the Fed suspects. Surprisingly, the majority of recent papers are hostile to the Phillips Curve model, or inclined to find special factors that explain low inflation, and in general question the basic presumptions of Fed policy.

This suggests that the intellectual confidence that the Federal Reserve system has in the standard model is badly shaken. That in turn would suggest a dovish bias.

Some excerpts below:

Charles Evans: If we say there will be inflation, there will be inflation

I am concerned that persistent factors are holding down inflation, rather than idiosyncratic transitory ones. Namely, the public’s inflation expectations appear to me to have drifted down below the Federal Open Market Committee’s (FOMC) 2 percent symmetric inflation target.

In order to dispel any impression that 2 percent is a ceiling, our communications should be much clearer about our willingness to deliver on a symmetric inflation outcome, acknowledging a greater chance of inflation at 2-1/2 percent in the future than what has been communicated in the past.

Kansas City Fed economist Didem Tuzemen: Changes in the labor force decouple prices and employment

Important changes in the age and skill composition of the labor force over the past two decades may have lowered the trend rate of unemployment. First, the share of older individuals in the labor force has increased as baby boomers have grown older; in addition, many older workers remain in the workforce longer than in the past. An aging labor force contributes to a lower natural rate, because the unemployment rate declines with age.

Second, technological advancements have led to changes in the composition of jobs and skills demanded in the labor force. More specifically, “job polarization” has resulted in a shift away from middle-skill occupations and toward high- and low-skill occupations (Autor and others; Goos and Manning; Autor; Tüzemen and Willis). Workers suitable for high-skill occupations tend to have lower unemployment rates compared with workers suitable for middle-skill occupations, which implies that job polarization may have lowered the trend rate of unemployment.

Minneapolis Fed Review article by Andrew Atkeson: the Phillips Curve doesn’t work

This study evaluates the conventional wisdom that modern Phillips curve-based models are useful tools for forecasting inflation. These models are based on the non-accelerating inflation rate of unemployment (the NAIRU). The study compares the accuracy, over the last 15 years, of three sets of inflation forecasts from NAIRU models to the naive forecast that at any date inflation will be the same over the next year as it has been over the last year. The conventional wisdom is wrong; none of the NAIRU forecasts is more accurate than the naive forecast.

San Francisco Fed economists Tim Mahedy and Adam Shapiro: Inflation no longer has much to do with growth

After eight years of economic recovery, inflation remains below the FOMC’s target. Dissecting the underlying price data by spending category reveals that low inflation largely reflects prices that are relatively insensitive to overall economic conditions. Notably, modest increases in health-care prices, which have been held down by mandated cuts to the growth of Medicare payments, have helped moderate overall inflation. Further slow growth in health-care prices is likely to remain a drag on inflation.

Cleveland Fed economists Edward S. Knotek and Saeed Zaman: Inflation dynamics haven’t changed but we can’t measure them now

We look at inflation through the lens of a flexible statistical model that can capture time-variation in inflation dynamics and in the relationship between inflation and unemployment. Using this model, we generate two sets of inflation forecasts. The first forecast is based on the most recent behavior of inflation and the unemployment rate. In the second forecast, we assume that inflation dynamics are governed by the behaviors we saw in the late 1990s—another period in which both the unemployment rate and inflation were notably low, but also one in which globalization and internet commerce may have been putting less downward pressure on inflation. In terms of the most likely paths going forward, the point forecasts for inflation and unemployment from these two approaches are generally similar—and, if anything, the projection based on recent inflation dynamics calls for a more rapid rise of inflation to 2 percent today than would have been the case in the late 1990s. But there is more uncertainty surrounding the point forecasts now than in the late 1990s, consistent with an economy that is now subject to larger shocks and a looser relationship between inflation and unemployment than in the past.

Conflitti and Luciani, Federal Reserve BOG staff (Oct 2017): The oil price did it

We estimate that the plunge in the WTI spot prices from roughly $100 per barrel to roughly $30 per barrel that occurred between July 2014 to February 2016 shaved-off a quarter of a percentage point from core PCE price inflation in 2015, and a third of a percentage point in 2016. We estimate that the drag from oil prices will persist in 2017 and 2018 (about two tenth each year), and that it will then disappear by 2020.