10 PART 1: RECENT ECONOMIC AND FINANCIAL DEVELOPMENTS h percentage point faster than its gain a year earlier. Among measures that do not take account of benefits, average hourly earnings rose slightly less than 3 percent through January of this year, a gain that was somewhat faster than the average increase in the preceding few years. Similarly, the measure of wage growth computed by the Federal Reserve bank of atlanta that tracks median 12-month wage growth of individuals reporting to the Current Population Survey showed an increase of about 3 percent in January, similar to its readings from the past three years and above the average increase in the preceding few years.' and likely was restrained by slow owth of lab ductivity 6. Change in business-sector output per hour These moderate rates of compensation gain likely reflect the offsetting influences of Percent, annual rate tightening labor market and persistently weak productivity growth. Since 2008, labor productivity has increased only a little more than I percent per year, on average, well 3 below the average pace from 1996 through 2007 and also below the gains in the 1974-95 period (figure 6). Considerable debate remains about the reasons for the general slowdown in productivity growth and whether it will persist The slowdown may be partly attributable to the sharp pullback in capital investment 1948 996-200 during the most recent recession and the NOTE: Changes are measured from Q4 of the year immediate relatively long period of modest growth easured from 2007: Q4 through 20/ar of the period. The final period is in investment that followed but a reduced SOURCE: Bureau of Labor Statistics via Haver Analytics. pace of capital deepening can explain only a portion of the step-down. Beyond that, some economists think that more recent technological advances, such as information technology, have been less revolutionary than earlier general-purpose technologies, such as electricity and internal combustion. Others have pointed to a slowdown in the speed at which capital and labor are reallocated toward their most productive uses, which is reflected in fewer business start-ups and a reduced 5. The atlanta Fed's measure differs from others that it measures the wage growth only of workers whe were employed both in the current survey month and 12 months earlier
10 Part 1: Recent Economic and Financial Developments ½ percentage point faster than its gain a year earlier. Among measures that do not take account of benefits, average hourly earnings rose slightly less than 3 percent through January of this year, a gain that was somewhat faster than the average increase in the preceding few years. Similarly, the measure of wage growth computed by the Federal Reserve Bank of Atlanta that tracks median 12-month wage growth of individuals reporting to the Current Population Survey showed an increase of about 3 percent in January, similar to its readings from the past three years and above the average increase in the preceding few years.5 . . . and likely was restrained by slow growth of labor productivity These moderate rates of compensation gain likely reflect the offsetting influences of a tightening labor market and persistently weak productivity growth. Since 2008, labor productivity has increased only a little more than 1 percent per year, on average, well below the average pace from 1996 through 2007 and also below the gains in the 1974–95 period (figure 6). Considerable debate remains about the reasons for the general slowdown in productivity growth and whether it will persist. The slowdown may be partly attributable to the sharp pullback in capital investment during the most recent recession and the relatively long period of modest growth in investment that followed, but a reduced pace of capital deepening can explain only a portion of the step-down. Beyond that, some economists think that more recent technological advances, such as information technology, have been less revolutionary than earlier general-purpose technologies, such as electricity and internal combustion. Others have pointed to a slowdown in the speed at which capital and labor are reallocated toward their most productive uses, which is reflected in fewer business start-ups and a reduced 5. The Atlanta Fed’s measure differs from others in that it measures the wage growth only of workers who were employed both in the current survey month and 12 months earlier. 1 2 3 4 Percent, annual rate 6. Change in business-sector output per hour 1948– 73 1974– 95 1996– 2000 2001– 07 2008– present NOTE: Changes are measured from Q4 of the year immediately preceding the period through Q4 of the final year of the period. The final period is measured from 2007:Q4 through 2017:Q4. SOURCE: Bureau of Labor Statistics via Haver Analytics
MONETARY POLICY REPORT: FEBRUARY 2018 11 pace of hiring and investment by the most innovative firms. Still others argue that there have been important innovations in many fields in recent years, from energy to medicine often underpinned by ongoing advances in information technology, which augurs well for productivity growth going forward. However, those economists note that such productivity gains may appear only slowly as new firms emerge to exploit the new technologies and as incumbent firms invest in new vintages of capital and restructure their businesses Price inflation remains below 2 percent, but the monthly readings picked up toward the end of 2017 7. Change in the price index for personal consumption Consumer price inflation, as measured by the 12-month change in the price index for 12-month percent chang personal consumption expenditures(PCE), remained below the FOMC's longer-run objective of 2 percent during most of 2017. rimmed mean The PCe price index increased 1.7 percent Excluding food and energy over the 12 months ending in december 2017 about the same as in 2016(figure 7). Core nflation, which typically provides a better indication than the headline measure of where overall inflation will be in the future was 1. 5 percent over the 12 months ending in December 2017-0. 4 percentage point lower L⊥1 than it had been one year earlier NOTE: The data extend through December 2017; changes are from one year Both measures of inflation reflected some A SOURCE: For trimmed mean, Federal Reserve Bank of Dallas; for all else, weak readings in the spring and summe of 2017. A portion of those weak readings seemed attributable to idiosyncratic events, such as a steep l-month decline in the price index for wireless telephone services. However the monthly readings on core inflation were somewhat higher during the last few months of 2017, in contrast to the more typical pattern that has prevailed in recent years in which readings around the end of the year have tended to be slightly below average. Moreover the 12-month change in the trimmed mean PCE price index-an alternative indicator of underlying inflation produced by the Federal eserve Bank of Dallas that may be less sensitive to idiosyncratic price movements- was 1.7 percent in December 2017 and has slowed by less than core PCe price inflation
MONETARY POLICY REPORT: FEBRUARY 2018 11 pace of hiring and investment by the most innovative firms. Still others argue that there have been important innovations in many fields in recent years, from energy to medicine, often underpinned by ongoing advances in information technology, which augurs well for productivity growth going forward. However, those economists note that such productivity gains may appear only slowly as new firms emerge to exploit the new technologies and as incumbent firms invest in new vintages of capital and restructure their businesses. Price inflation remains below 2 percent, but the monthly readings picked up toward the end of 2017 Consumer price inflation, as measured by the 12-month change in the price index for personal consumption expenditures (PCE), remained below the FOMC’s longer-run objective of 2 percent during most of 2017. The PCE price index increased 1.7 percent over the 12 months ending in December 2017, about the same as in 2016 (figure 7). Core inflation, which typically provides a better indication than the headline measure of where overall inflation will be in the future, was 1.5 percent over the 12 months ending in December 2017—0.4 percentage point lower than it had been one year earlier. Both measures of inflation reflected some weak readings in the spring and summer of 2017. A portion of those weak readings seemed attributable to idiosyncratic events, such as a steep 1-month decline in the price index for wireless telephone services. However, the monthly readings on core inflation were somewhat higher during the last few months of 2017, in contrast to the more typical pattern that has prevailed in recent years in which readings around the end of the year have tended to be slightly below average. Moreover, the 12-month change in the trimmed mean PCE price index—an alternative indicator of underlying inflation produced by the Federal Reserve Bank of Dallas that may be less sensitive to idiosyncratic price movements— was 1.7 percent in December 2017 and has slowed by less than core PCE price inflation Excluding food and energy Trimmed mean + _ 0 .5 1.0 1.5 2.0 2.5 3.0 12-month percent change 2011 2012 2013 2014 2015 2016 2017 7. Change in the price index for personal consumption expenditures Monthly Total NOTE: The data extend through December 2017; changes are from one year earlier. SOURCE: For trimmed mean, Federal Reserve Bank of Dallas; for all else, Bureau of Economic Analysis; all via Haver Analytics
12 PART 1: RECENT ECONOMIC AND FINANCIAL DEVELOPMENTS over the past 12 months. 6(For more discussion of inflation both in the United States and abroad. see the box " Low Inflation in the Advanced Economies. Oil and metals prices increased notably 8. Brent spot and futures prices Headline inflation was a little higher than Weekly Dollars per barrel core inflation last year, which reflected a rise in consumer energy prices. The price of crude Spot price oil rose from $48 per barrel at the end of Jur to a peak of about $70 per barrel early in the year and, even after recent declines, remains futures contracts more than 30 percent above its mid-2017 level -70(figure 8). The upswing in oil prices appears to have been driven primarily by strengthening global demand as well as OPEC's decision to further extend its November 2016 production LLLlll⊥」 cuts through the end of 2018. the higher oil prices fed through to moderate increases in the NoTE: The data are weekly averages of daily data and extend through cost of gasoline and heating oil February 21, 2018 OURCE: ICE Brent Futures via Bloombe Inflation momentum was also supported by nonfuel import prices, which rose throughout 9. Nonfuel import prices and industrial metals indexes 2017 in part because of dollar depreciation ( figure 9). That development marked a turn from the past several years, during which 120一 nonfuel import prices declined or held flat In addition to the decline in the dollar nonfuel import prices were driven higher by a substantial increase in the price of industrial metals. Despite recent volatility, metals prices 00 remain higher, on net, boosted primarily by Nonfuel import prices improved prospects for global demand and Industrial metals also by government policies that restrained 94 production in China L」 01520162017 In contrast headline inflation has been industrial metals are a monthly average of daily data and extend through held down by consumer food prices, which increased only about 7 percent in 2017 after SOURcE: For nonfuel import pr Labor Stat ndustrial metals, S&P GSCI Indu Metals s having declined in 2016. Food prices have 6. The trimmed mean index excludes whatever prices showed the largest increases or decreases in a given month; for example, the sharp decline in prices fo wireless telephone services in March 2017 was excluded from this index
12 Part 1: Recent Economic and Financial Developments over the past 12 months.6 (For more discussion of inflation both in the United States and abroad, see the box “Low Inflation in the Advanced Economies.”) Oil and metals prices increased notably Headline inflation was a little higher than core inflation last year, which reflected a rise in consumer energy prices. The price of crude oil rose from $48 per barrel at the end of June to a peak of about $70 per barrel early in the year and, even after recent declines, remains more than 30 percent above its mid-2017 level (figure 8). The upswing in oil prices appears to have been driven primarily by strengthening global demand as well as OPEC’s decision to further extend its November 2016 production cuts through the end of 2018. The higher oil prices fed through to moderate increases in the cost of gasoline and heating oil. Inflation momentum was also supported by nonfuel import prices, which rose throughout 2017 in part because of dollar depreciation (figure 9). That development marked a turn from the past several years, during which nonfuel import prices declined or held flat. In addition to the decline in the dollar, nonfuel import prices were driven higher by a substantial increase in the price of industrial metals. Despite recent volatility, metals prices remain higher, on net, boosted primarily by improved prospects for global demand and also by government policies that restrained production in China. In contrast, headline inflation has been held down by consumer food prices, which increased only about ½ percent in 2017 after having declined in 2016. Food prices have 6. The trimmed mean index excludes whatever prices showed the largest increases or decreases in a given month; for example, the sharp decline in prices for wireless telephone services in March 2017 was excluded from this index. Spot price 20 30 40 50 60 70 80 90 100 110 120 130 Dollars per barrel 2014 2015 2016 2017 2018 8. Brent spot and futures prices Weekly 24-month-ahead futures contracts NOTE: The data are weekly averages of daily data and extend through February 21, 2018. SOURCE: ICE Brent Futures via Bloomberg. Nonfuel import prices 94 96 98 100 102 104 January 2014 = 100 70 80 90 100 110 120 2014 2015 2016 2017 2018 9. Nonfuel import prices and industrial metals indexes January 2014 = 100 Industrial metals NOTE: The data for nonfuel import prices are monthly. The data for industrial metals are a monthly average of daily data and extend through February 21, 2018. SOURCE: For nonfuel import prices, Bureau of Labor Statistics; for industrial metals, S&P GSCI Industrial Metals Spot Index via Haver Analytics
MONETARY POLICY REPORT: FEBRUARY 2018 13 been restrained by softness in the prices of farm commodities, which in turn has reflected robust supply in the United States and abroad Although the harvests for many crops in the United States declined in 2017, they were larger than had been expected earlier in the year Survey-based measures of inflation expectations have been generally stable Expectations of inflation likely influence actual nflation by affecting wage-and price-setting decisions. Survey-based measures of inflation expectations at medium- and longer-term 10. Median inflation expectations horizons have remained generally stable. In the Survey of Professional Forecasters conducted by the Federal Reserve Bank of Philadelphia the median expectation for the annual rate of Michigan survey expectations for next 5 to 10 years increase in the PCe price index over the next 10 years has been around 2 percent for the past several years(figure 10). In the University of Michigan Surveys of Consumers, the median value for inflation expectations over the next for next 10 years 5 to 10 years-which had drifted downward starting in 2014--has held about flat since the end of 2016 at a level that is a few tenths lower than had prevailed through 2014 NOTE: The Michigan survey data are monthly and extend through February, the February data are preliminary. The SPF data for inflation and market-based measures of expectations for personal consumption expenditures are quarterly and extend nflation compensation have increased in SOURCE: University of Michigan Surveys of Consumers: Federal Reserve Bank of Philadelphia. Survey of Professional Forecasters (SPF) recent months but remain relatively low Inflation expectations can also be gauged by market-based measures of inflation compensation, though the inference is not straightforward because market-based measures can be importantly affected by changes in premiums that provide compensation for bearing inflation and liquidity risks. Measures of longer-term inflation compensation-derived either from differences between yields on nominal Treasury securities and those on comparable Treasury Inflation-Protected Securities(TIPS)or from inflation swaps-have increased since June returning to levels seen in early 2017, but
MONETARY POLICY REPORT: FEBRUARY 2018 13 been restrained by softness in the prices of farm commodities, which in turn has reflected robust supply in the United States and abroad. Although the harvests for many crops in the United States declined in 2017, they were larger than had been expected earlier in the year. Survey-based measures of inflation expectations have been generally stable... Expectations of inflation likely influence actual inflation by affecting wage- and price-setting decisions. Survey-based measures of inflation expectations at medium- and longer-term horizons have remained generally stable. In the Survey of Professional Forecasters conducted by the Federal Reserve Bank of Philadelphia, the median expectation for the annual rate of increase in the PCE price index over the next 10 years has been around 2 percent for the past several years (figure 10). In the University of Michigan Surveys of Consumers, the median value for inflation expectations over the next 5 to 10 years—which had drifted downward starting in 2014—has held about flat since the end of 2016 at a level that is a few tenths lower than had prevailed through 2014. . . . and market-based measures of inflation compensation have increased in recent months but remain relatively low Inflation expectations can also be gauged by market-based measures of inflation compensation, though the inference is not straightforward because market-based measures can be importantly affected by changes in premiums that provide compensation for bearing inflation and liquidity risks. Measures of longer-term inflation compensation—derived either from differences between yields on nominal Treasury securities and those on comparable Treasury Inflation-Protected Securities (TIPS) or from inflation swaps—have increased since June, returning to levels seen in early 2017, but Michigan survey expectations for next 5 to 10 years 1 2 3 4 Percent 2006 2008 2010 2012 2014 2016 2018 SPF expectations for next 10 years 10. Median inflation expectations NOTE: The Michigan survey data are monthly and extend through February; the February data are preliminary. The SPF data for inflation expectations for personal consumption expenditures are quarterly and extend from 2007:Q1 through 2018:Q1. SOURCE: University of Michigan Surveys of Consumers; Federal Reserve Bank of Philadelphia, Survey of Professional Forecasters (SPF)
14 PART 1: RECENT ECONOMIC AND FINANCIAL DEVELOPMENTS Low Inflation in the advanced economies Inflation has been persistently low in recent years B. Inflation excluding food and energy in selected across many advanc onomies. In the United States advanced foreign economies both overall inflation and core(excluding food and energy prices)inflation, as measured by the price index Monthly for personal consumption expenditures, have run below 2 percent for most of the period since 2008(figure A) In other advanced economies, measures of core United Kingdom inflation have run even lower in some cases, with core inflation in the euro area currently at around 1 percent and in Japan at close to zero(figure B) What explains this period of low inflation? Across the advanced economies, the main factors holding flation down likely include the extended period of economic slack following the Great Recession and the falling prices of oil and other commodities from around mid-2014 to early 2016. In the United States, L inflation also has been held down by the rise in the 20122014201 foreign exchange value of the dollar from mid-2014 through 2016. The low core U.S. inflation in 2017 has 2018. The data for Canada and Japan extend through December 2017 been more of a puzzle(albeit modest in magnitude) irs and Communications: for the and harder to associate with an identifiable cause. Statistical Office of the European Communities: for Canada, Statistics Canada: all via Haver Analytics. As is discussed in the December 2017 Summary of Economic Projections(Part 3 of this report),most Federal Reserve policymakers view these recent low But our understanding of the forces that drive nflation readings as likely to prove transitory and inflation is imperfect, and the fact that many advanced project U.S. inflation this year to move closer to their economies are experiencing low inflation at the same percent objective. Many private forecasters appear to time suggests that other, possibly more persistent, share this view factors may be at work. As one possibility, the natural rate of unemployment-the rate at which labor markets 1. For additional discussion of the reasons for low inflation in the United States, see Janet Yellen(2017),Inflation exert neither upward nor downward pressure on nflation---is highly uncertain, and it could be lower Prospects for Growth: Reassessing the Fundamentals, "59th in many economies than most economists estimate Annual Meeting of the National Association for Business Alternatively, inflation expectations could be lower ederalreserve-gow/newsevents/speech/yellen20170926a htm. than suggested by the available indicators More-fundamental changes in the global economy A. Change in the price index for personal consumption could also be contributing to the recent stretch of expenditures lower inflation. First, anecdotal reports suggest that technological changes could be reducing pricing Monthly 12-month percent change power in many industries, holding down inflation as that occurs. For example, the increased prevalence of 5 Internet shopping allows consumers to compare prices 4 more easily across sellers, possibly implying greater competition that could be putting downward pressure on consumer prices (figure C). While this hypothesis is 2 certainly plausible, it does not easily square with the observation that, at least within the United States, profit margins have been high(figure D). 2. Goldman Sachs(2017),"The Amazon Effect in 2 Perspective, "U.S. Economics Analyst (New York: Goldman 7: changes are from one yea of Economic Advisers Issue Brief (Washington: CEA, April), earlier https://obamawhitehouse.archivesgow/sites/default/files/page/ SOURCE: Bureau of Economic Analysis via Haver Analytics. files/20160414_cea_competition_issue_brief pdt
14 Part 1: Recent Economic and Financial Developments But our understanding of the forces that drive inflation is imperfect, and the fact that many advanced economies are experiencing low inflation at the same time suggests that other, possibly more persistent, factors may be at work. As one possibility, the natural rate of unemployment—the rate at which labor markets exert neither upward nor downward pressure on inflation—is highly uncertain, and it could be lower in many economies than most economists estimate. Alternatively, inflation expectations could be lower than suggested by the available indicators. More-fundamental changes in the global economy could also be contributing to the recent stretch of lower inflation. First, anecdotal reports suggest that technological changes could be reducing pricing power in many industries, holding down inflation as that occurs.2 For example, the increased prevalence of Internet shopping allows consumers to compare prices more easily across sellers, possibly implying greater competition that could be putting downward pressure on consumer prices (figure C). While this hypothesis is certainly plausible, it does not easily square with the observation that, at least within the United States, profit margins have been high (figure D).3 Inflation has been persistently low in recent years across many advanced economies. In the United States, both overall inflation and core (excluding food and energy prices) inflation, as measured by the price index for personal consumption expenditures, have run below 2 percent for most of the period since 2008 (figure A). In other advanced economies, measures of core inflation have run even lower in some cases, with core inflation in the euro area currently at around 1 percent and in Japan at close to zero (figure B). What explains this period of low inflation? Across the advanced economies, the main factors holding inflation down likely include the extended period of economic slack following the Great Recession and the falling prices of oil and other commodities from around mid-2014 to early 2016. In the United States, inflation also has been held down by the rise in the foreign exchange value of the dollar from mid-2014 through 2016. The low core U.S. inflation in 2017 has been more of a puzzle (albeit modest in magnitude) and harder to associate with an identifiable cause.1 As is discussed in the December 2017 Summary of Economic Projections (Part 3 of this report), most Federal Reserve policymakers view these recent low inflation readings as likely to prove transitory and project U.S. inflation this year to move closer to their 2 percent objective. Many private forecasters appear to share this view. Low Inflation in the Advanced Economies Excluding food and energy 2 1 + _ 0 1 2 3 4 5 12-month percent change 2007 2009 2011 2013 2015 2017 A. Change in the price index for personal consumption expenditures Monthly Total NOTE: The data extend through December 2017; changes are from one year earlier. SOURCE: Bureau of Economic Analysis via Haver Analytics. 1. For additional discussion of the reasons for low inflation in the United States, see Janet Yellen (2017), “Inflation, Uncertainty, and Monetary Policy,” speech delivered at “Prospects for Growth: Reassessing the Fundamentals,” 59th Annual Meeting of the National Association for Business Economics, Cleveland, Ohio, September 26, https://www. federalreserve.gov/newsevents/speech/yellen20170926a.htm. United Kingdom Canada Euro area 2 1 + _ 0 1 2 3 4 12-month percent change 2008 2010 2012 2014 2016 2018 B. Inflation excluding food and energy in selected advanced foreign economies Monthly Japan NOTE: The data for the euro area incorporate the flash estimate for January 2018. The data for Canada and Japan extend through December 2017. SOURCE: For the United Kingdom, Office for National Statistics; for Japan, Ministry of International Affairs and Communications; for the euro area, Statistical Office of the European Communities; for Canada, Statistics Canada; all via Haver Analytics. 2. Goldman Sachs (2017), “The Amazon Effect in Perspective,” U.S. Economics Analyst (New York: Goldman Sachs, September 30). 3. See Council of Economic Advisers (2016), “Benefits of Competition and Indicators of Market Power,” Council of Economic Advisers Issue Brief (Washington: CEA, April), https://obamawhitehouse.archives.gov/sites/default/files/page/ files/20160414_cea_competition_issue_brief.pdf