Tuesday, February 3, 2015

The Fed seems over-optimistic on inflation

We have two links (here, here) from Mark Thoma that serve as accompanying reading for the update of the comparisons between the predictions of PCE inflation from the information transfer model (blue, gray intervals) and two sets of predictions from Federal Reserve. The newly updated PCE monthly inflation data (green, now to December 2014) continue to skirt the lower 90% confidence interval of the NY Fed's DSGE model (red):

The confidence intervals (for both the Fed DSGE and ITM) are for quarterly data, though (the darker green line) which doesn't look as bad. The latest jag towards zero isn't as apparent in the average.

The predicted values from the Federal Reserve Board members continue to be high:

The thick dotted green line indicates the annual average of the monthly data.

I haven't updated David Beckworth's 'inflation corridor' explanation in awhile. It is doing fine, but signals that the Fed is going to try and do some asset purchases soon since we're at his 1% PCE inflation lower bound:

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