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Early Indicators Suggest Recent Low Inflation Readings Will Likely Be Revised Upward, Says Dallas Fed Economic Letter

Small set of timelier price indicators offers power to ‘nowcast’ PCE inflation

For Immediate Release: August 23, 2017

DALLAS—Early indicators offer the ability to “nowcast” inflation in real time, according to the Federal Bank of Dallas’ latest Economic Letter. This analysis suggests that recent low U.S. inflation readings may be revised upward, according to the authors.

In “Getting a Jump on Inflation,” Alan Armen, senior research analyst, and Evan F. Koenig, senior vice president and principal policy advisor at the Dallas Fed, discuss how a small set of timely inflation indicators can be combined to anticipate movements in the personal consumption expenditures (PCE) chain price index—the preferred inflation gauge of Federal Reserve policymakers.

“The analysis shows that one need not wait for official PCE inflation estimates from the U.S. Bureau of Economic Analysis (BEA) to get an accurate read on inflation,” the authors write. “Moreover, the earliest official PCE inflation estimates should not be taken at face value. Recent low inflation readings will likely be revised upward.”

The Federal Reserve has a mandate to pursue long-run price stability, and its current goal is 2 percent annual inflation as measured by the headline PCE chain price index.

PCE inflation has broader coverage and is more responsive to shifting spending patterns than inflation as measured by the Consumer Price Index (CPI). However, the authors note that “the greater sophistication of the PCE inflation gauge comes at a price in timeliness.” The initial estimate from the BEA is released with a one-month lag and is subject to revision months—and even years—later.

Fortunately, a set of timelier indicators, including CPI inflation and data from Federal Reserve Bank regional surveys, can provide an accurate advance read on PCE inflation.

“The PCE inflation ‘nowcasts’ obtained by combining information from the CPI report with Fed survey results are competitive with government statisticians’ first and third direct estimates of PCE inflation, which aren’t available until much later,” the authors write.

Using this analysis, estimated April 2017 PCE inflation at 1.72 percent and June 2017 PCE inflation at 1.42 percent will likely be revised higher—to 1.90 percent and 1.55 percent, respectively, according to the authors.


Media contact:
Jennifer Chamberlain
Federal Reserve Bank of Dallas
Phone: (214) 922-6748