There is new CPI data out today, so I've updated the lag model. It looks like it's not doing too well. There's the spike in January/February, which might be transient. It's within 3 sigma (0.03%, or one month in 30 years), but it occurs in both PCE and CPI data which makes it more like 4.5 sigma (one month in 12,000 years -- since the last ice age). That's troubling, but another problem is the IE lag model is consistently under-estimating the last 8 measurements of CPI inflation (there's a bias), which is a 0.4% probability event (about 3 sigma) on its own.
I could try to console myself with the fact that the measurement of CPI inflation changed slightly in January 2016 (they started using an arithmetic mean for prescription drug prices, but that's a small component of CPI). However that doesn't fix the consistent bias. I'll still follow this model however -- the data does show periods of persistent over- and under- shooting.
Note that this is just the lagged-GDP model of CPI inflation (that I'd hoped might squeeze a few basis points more accuracy out of the data), not the PCE inflation model that is in a head-to-head competition with NY Fed DSGE model (see here for the list of predictions).
Jason, try repeating this taking out rent inflation I.e. apply your model to core minus shelter. Core minus shelter is under 1.5%. total inflation is being distorted by shelter inflation which is high for supply reasons, not demand. It is a travesty that the Fed would tighten because of shelter supply constraints... the tightening makes building the supply we need harder, leading to higher rent inflation even while killing the rest of the economy.
ReplyDeleteThis is an example of why the Fed should target NGDP instead of inflation.
Unfortunately shelter doesn't have the right trend -- it would need to be "normal" up until the end of 2015 and suddenly take off. Shelter appears to gradually rise from the onset of the Great Recession.
DeleteApparel component actually has closer to the right behavior:
https://research.stlouisfed.org/fred2/graph/?g=4J9h
But there's no reason to reject any component in this model, so I can't pick and choose. Using core is kind of picking and choosing, but by the econ community -- not me!
Also, the model is fine without the lag except for the one spike in January 2016 (but it also has a larger error bar, so it's not a 3-sigma deviation, but more like a 2-sigma one). I'm not too broken up about it :)
Jason, try repeating this taking out rent inflation I.e. apply your model to core minus shelter. Core minus shelter is under 1.5%. total inflation is being distorted by shelter inflation which is high for supply reasons, not demand. It is a travesty that the Fed would tighten because of shelter supply constraints... the tightening makes building the supply we need harder, leading to higher rent inflation even while killing the rest of the economy.
ReplyDeleteThis is an example of why the Fed should target NGDP instead of inflation.
Jason, thanks for the update.
ReplyDelete