What Will Inflation Be over the Next Year?

Tuesday, October 04, 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
Commenting Policy: We encourage comments and discussions on our posts, even those that disagree with conclusions, if they are done in a respectful and courteous manner. All comments posted to our blog go through a moderator, so they won't appear immediately after being submitted. We reserve the right to remove or not publish inappropriate comments. This includes, but is not limited to, comments that are:
  • Vulgar, obscene, profane or otherwise disrespectful or discourteous
  • For commercial use, including spam
  • Threatening, harassing or constituting personal attacks
  • Violating copyright or otherwise infringing on third-party rights
  • Off-topic or significantly political
The St. Louis Fed will only respond to comments if we are clarifying a point. Comments are limited to 1,500 characters, so please edit your thinking before posting. While you will retain all of your ownership rights in any comment you submit, posting comments means you grant the St. Louis Fed the royalty-free right, in perpetuity, to use, reproduce, distribute, alter and/or display them, and the St. Louis Fed will be free to use any ideas, concepts, artwork, inventions, developments, suggestions or techniques embodied in your comments for any purpose whatsoever, with or without attribution, and without compensation to you. You will also waive all moral rights you may have in any comment you submit.
comments powered by Disqus

The St. Louis Fed uses Disqus software for the comment functionality on this blog. You can read the Disqus privacy policy. Disqus uses cookies and third party cookies. To learn more about these cookies and how to disable them, please see this article.

Subscribe to
On the Economy

Get notified when new content is available on our On the Economy blog.

Email Alerts  |  RSS

About the Blog

The St. Louis Fed On the Economy blog features relevant commentary, analysis, research and data from our economists and other St. Louis Fed experts.

Views expressed are not necessarily those of the Federal Reserve Bank of St. Louis or of the Federal Reserve System.

Contact Us

For media-related questions, email mediainquiries@stls.frb.org. For all other blog-related questions or comments, email on-the-economy@stls.frb.org.