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Working Paper
Indirect Consumer Inflation Expectations: Theory and Evidence
Based on indirect utility theory, we introduce a novel methodology of measuring inflation expectations indirectly. This methodology starts at the individual level, asking consumers about the change in income required to buy the same amounts of goods and services one year ahead. Analytically, our methodology possesses smaller ex-post aggregate inflation forecast errors relative to forecasts based on conventional survey questions. We ask this question in a large-scale, high-frequency survey of consumers in the US and 14 countries, and we show that indirect consumer inflation expectations ...
Journal Article
The Survey of Firms’ Inflation Expectations
The inflation expectations of individuals who lead firms can influence the prices that their firms charge customers and hence can influence overall inflation. This Economic Commentary summarizes results from the Survey of Firms’ Inflation Expectations (SoFIE), which asks top business executives for their inflation expectations once per quarter alongside a second question from a rotating set. We document that this group’s inflation expectations increased with the run-up in inflation over 2021 and 2022 but then began to decline in early 2023. The Cleveland Fed will post estimates from the ...
Discussion Paper
How Do Firms Adjust Prices in a High Inflation Environment?
How do firms set prices? What factors do they consider, and to what extent are cost increases passed through to prices? While these are important questions in general, they become even more salient during periods of high inflation. In this blog post, we highlight preliminary results from ongoing research on firms’ price-setting behavior, a joint project between researchers at the Federal Reserve Banks of Atlanta, Cleveland, and New York. We use a combination of open-ended interviews and a quantitative survey in our analysis. Firms reported that the strength of demand was the most important ...
Journal Article
How will unemployment fare following the recession?
Since the start of the recession in December 2007, the U.S. unemployment rate has risen more than four percentage points. Similar sharp increases in unemployment have occurred in other severe recessions, such as those in 1973-75 and 1981-82. In the aftermath of those severe recessions, the economy rapidly recovered and unemployment quickly declined. ; Will unemployment behave similarly following this recession? One reason why unemployment may not fall as quickly this time is that the labor market has changed substantively since the early 1980s. In the two recoveries since then, not only did ...
Working Paper
Real-Time Density Nowcasts of US Inflation: A Model-Combination Approach
We develop a flexible modeling framework to produce density nowcasts for US inflation at a trading-day frequency. Our framework: (1) combines individual density nowcasts from three classes of parsimonious mixed-frequency models; (2) adopts a novel flexible treatment in the use of the aggregation function; and (3) permits dynamic model averaging via the use of weights that are updated based on learning from past performance. Together these features provide density nowcasts that can accommodate non-Gaussian properties. We document the competitive properties of the nowcasts generated from our ...
Journal Article
Consumers and COVID-19: A Real-Time Survey
We summarize the results from an ongoing survey that asks consumers questions related to the recent coronavirus outbreak, including their expectations for how the economy is likely to be affected by the outbreak and how their own behavior has changed in response to it. The survey began in early March, providing a window into how consumers’ responses have evolved in real time since the early days of the acknowledged spread of COVID-19 in the United States. In updating and charting the survey’s findings on the Cleveland Fed’s website going forward, we seek to inform policymakers and ...
Journal Article
Expected Post-Pandemic Consumption and Scarred Expectations from COVID-19
The COVID-19 vaccination drive raises questions about the trajectory of the economic recovery and the pandemic’s impact on consumers’ longer-term behaviors. In this Commentary, we examine the evolution of consumers’ expectations for their post-crisis spending on services that have been dramatically curtailed by the pandemic: visiting restaurants, bars, and hotels, using public transportation, and attending crowded events. We document a U-shaped pattern of expected future use of these services, with growing pessimism in summer 2020 that had largely reversed by fall 2020—for most ...
Working Paper
Alternative methods of solving state-dependent pricing models
We use simulation-based techniques to compare and contrast two methods for solving state-dependent pricing models: discretization, which solves and simulates the model on a grid; and collocation, which relies on Chebyshev polynomials. While both methods produce qualitatively similar results, statistically significant quantitative differences do arise. We present evidence favoring discretization over collocation in this context, given a lack of robustness in the latter.
Working Paper
Forecasting GDP Growth with NIPA Aggregates
Beyond GDP, which is measured using expenditure data, the U.S. national income and product accounts (NIPAs) provide an income-based measure of the economy (gross domestic income, or GDI), a measure that averages GDP and GDI, and various aggregates that include combinations of GDP components. This paper compiles real-time data on a variety of NIPA aggregates and uses these in simple time-series models to construct out-of-sample forecasts for GDP growth. Over short forecast horizons, NIPA aggregates?particularly consumption and GDP less inventories and trade?together with these simple ...
Working Paper
Estimates of Cost-Price Passthrough from Business Survey Data
We examine businesses' price-setting practices via open-ended interviews and in a quantitative survey module with business contacts from the Federal Reserve Banks of Atlanta, Cleveland, and New York in December 2022 and January 2023. Businesses indicated that their prices were strongly influenced by demand, a desire to maintain steady profit margins, and wages and labor costs. Survey respondents expected reduced growth in costs and prices of about 5 percent on average over the next year. Backward-looking, forward-looking, and hypothetical scenarios reveal average cost-price passthrough of ...