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Is Trend Inflation at Risk of Becoming Unanchored? The Role of Inflation Expectations, Accessible Data
Figure 1. Trend Inflation and Uncertainty
Panel on the left depicts the estimated trend core PCE inflation (blue solid line), taking signal from past inflation, trimmed-mean inflation, and survey forecasts, with sample from Jan/2000 to Mar/2022. Dotted line represents the 2 percent inflation target. Panel on the right depicts the estimated uncertainty of the trend inflation. Dashed blue lines in each panel represent the sample average of the trend inflation and of the uncertainty, respectively. Dot-dashed blue lines represent a 90% coverage band of the trend inflation and of the uncertainty, respectively. Shaded gray bars indicate periods of business recession as defined by the National Bureau of Economic Research (NBER): December 2007 to June 2009, and February 2020 to April 2020.
Figure 2. Counterfactual Trend Inflation and Uncertainty
Panel on the left depicts the estimated trend core PCE inflation (blue solid line), taking signal from past inflation, trimmed-mean inflation, and survey forecasts, with counterfactual sample from Jan/2000 to Sep/2022. Dotted line represents the 2 percent inflation target. Panel on the right depicts the estimated uncertainty of the trend inflation. Dashed blue lines in each panel represent the sample average of the trend inflation and of the uncertainty, respectively. Dot-dashed blue lines represent a 90% coverage band of the trend inflation and of the uncertainty, respectively. Shaded gray bars indicate periods of business recession as defined by the National Bureau of Economic Research (NBER): February 2020 to April 2020. Shaded red bars represents the counterfactual period (Apr/2022 to Sep/2022).
Table 2: Forecasting Performance. Root-Mean-Squared Errors (RMSE) and Ratios
| Trend measure | 12-months ahead | 36-months ahead | 60-months ahead |
|---|---|---|---|
| Full sample (Jan/1960 – Jan/2022) | |||
| Past inflation: average deviation | 0.89 percent | 1.13 percent | 1.28 percent |
| Trimmed and median measures | 0.92 | 0.88 | 0.81 |
| Surveys | 1.19 | 1.08 | 1.10 |
| “All-in” (past, trimmed, and surveys) | 1.23 | 1.11 | 1.12 |
| Pre-2000s (Jan/1960 – Dec/1999) | |||
| Past inflation: average deviation | 0.93 percent | 1.35 percent | 1.56 percent |
| Trimmed and median measures | 0.86 | 0.84 | 0.80 |
| Surveys | 1.30 | 1.10 | 1.10 |
| “All-in” (past, trimmed, and surveys) | 1.19 | 1.06 | 1.05 |
| Recent periods (Jan/2000 – Jan/2022) | |||
| Past inflation: average deviation | 0.92 percent | 0.58 percent | 0.60 percent |
| Trimmed and median measures | 0.70 | 0.77 | 0.67 |
| Surveys | 0.68 | 0.66 | 0.59 |
| “All-in” (past, trimmed, and surveys) | 0.67 | 0.59 | 0.47 |
Figure A.1. Models with Past Inflation and Trimmed-Mean Measures for Full Sample
Left panel depicts the estimated trend core PCE inflation, with solid black line representing a model that takes signal only from past inflation, and solid red line representing a model that takes signal only from trimmed-mean inflation, both with sample from Jan/1960 to Mar/2022. Dotted line represents the 2 percent inflation target. Panel on the right depicts the estimated uncertainty of these two trend inflations. Dot-dashed black and dot-dashed red lines represent a 90% coverage band of the trend inflation and of the uncertainty, respectively. Shaded gray bars indicate periods of business recession as defined by the National Bureau of Economic Research (NBER): December 1969 to November 1970, November 1973 to March 1975, January 1980 to July 1980, July 1981 to November 1982, July 1990 to March 1991, March 2001 to November 2001, December 2007 to June 2009, and February 2020 to April 2020.
Figure A.2. Model with Surveys and Baseline “All-in” Model for Full Sample
Left panel depicts the estimated trend core PCE inflation, with solid blue line representing a model that takes signal from past inflation, trimmed-mean inflation, and survey forecasts, and solid green line representing a model that takes signal only from surveys, both with sample from Jan/1960 to Mar/2022. Dotted line represents the 2 percent inflation target. Panel on the right depicts the estimated uncertainty of these two trend inflations. Dot-dashed blue and dot-dashed green lines represent a 90% coverage band of the trend inflation and of the uncertainty, respectively. Shaded gray bars indicate periods of business recession as defined by the National Bureau of Economic Research (NBER): December 1969 to November 1970, November 1973 to March 1975, January 1980 to July 1980, July 1981 to November 1982, July 1990 to March 1991, March 2001 to November 2001, December 2007 to June 2009, and February 2020 to April 2020.