Inflation expectations still well anchored, according to Cleveland Fed researchers

Researchers at the Federal Reserve Bank of Cleveland have developed a simple measure of inflation expectations that provides some advantages over other commonly used measures. According to the latest estimates from the Cleveland Fed model, long-term inflation expectations (1.84 percent, on average, over the next 10 years) are still well anchored, a fact that may be important in deciding when to tighten monetary policy.

Combining data from a number of different sources, the Cleveland Fed measure:

--Can look at many maturities (time horizons), producing a yield curve of expected inflation.

--Explicitly estimates the inflation risk premium, providing a piece of information not readily available from either surveys or the "break-even" rate derived from Treasury inflation protected securities (TIPS). The risk premium measures how worried people are about inflation ending up significantly higher or lower than what they expect.

--Is cleaner. It is adjusted for the inflation risk premium, and does not count liquidity differences as inflation expectations.

--Can remove short-term influences on the price level that are not under the control of the monetary authority, such as oil price shocks, unemployment effects, and shifts in the demand for money.

Estimates of inflation expectations derived from the Cleveland Fed model will be updated once a month, on the release date of the Consumer Price Index.

A discussion of the advantages of the model (see Inflation: Noise, Risk, and Expectations), subscription information, and other details can be found on the Bank's website.