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What Will Inflation Be over the Next Year?

Tuesday, October 4, 2016
st louis fed price pressures measure

By Kevin Kliesen, Business Economist and Research Officer

On Friday, the Bureau of Economic Analysis released the Personal Income and Outlays report for August 2016. Included in this report was an estimate of the change in prices paid by consumers in August. Consumer prices rose 0.1 percent in August and were up 1 percent over the previous 12 months, as measured by the personal consumption expenditures price index (PCEPI).  

Beginning in January 2012, the Federal Open Market Committee established a 2 percent inflation target for the PCEPI. Thus, monetary policymakers are continually assessing the outlook for inflation.

But the public and financial markets also care about future inflation. To assist policymakers and others, the St. Louis Fed developed the Price Pressures Measure (PPM).1 Briefly, the PPM uses a sophisticated time series forecasting model to predict inflation (measured on a 12-month percent change basis) over the next 12 months. A separate method then assigns the distribution over the next 12 months to four probability distribution “buckets:”

  • Inflation less than zero percent (deflation)
  • Inflation between zero and 1.5 percent
  • Inflation between 1.5 and 2.5 percent
  • Inflation greater than 2.5 percent

The PPM is the probability that inflation will exceed 2.5 percent over the next 12 months.

As the figure shows, the model indicates a 9 percent probability that inflation will exceed 2.5 percent over the next 12 months.2 The model also indicates that the highest probability distribution for future inflation resides in the 0 percent to 1.5 percent bucket (52 percent). The next highest distribution is in the 1.5 percent to 2.5 percent bucket (32 percent). 

The PPM and inflation probability distributions are updated after each monthly release of the Personal Income and Outlays report and made available on the St. Louis Fed’s FRED database.

Notes and References

1 For a discussion of the technical aspects of this approach, see Jackson, Laura E.; Kliesen, Kevin L.; and Owyang, Michael T. “A Measure of Price Pressures.” Federal Reserve Bank of St. Louis Review, First Quarter 2015, Vol. 97, Issue 1, pp. 25-52.

2 These data are available on FRED.

Additional Resources

Posted In Inflation  |  Tagged kevin klieseninflationprice pressures measureppminflation expectationspersonal consumption expenditures price index
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