Indeks
A trip to the supermarket with Sara Beatty shows why officials at the Federal Reserve think there's a chance inflation won't get out of hand, and why they're afraid it might.
``I am a really good shopper,'' said the Springfield, Virginia, mother of seven as she bought groceries on a hot July evening. She's making up for higher prices for staples such as bread, eggs and pasta by spending less on restaurant meals and entertainment. The family cut out a planned trip to Wisconsin because gasoline is too expensive.
A team of six Fed staff economists hunts down clues in advertisements, industry surveys and calls to retailers to determine how households like Beatty's are adjusting to soaring food and fuel costs. Their work will end up in a forecast for price indicators that the staff prepares for every meeting of the policy making Federal Open Market Committee.
``You use a fair amount of finesse, judgment, anecdotes and indicators,'' said Michael Feroli, an economist at JPMorgan Chase & Co. in New York, who tracked business investment for the Fed forecasting team from 2003 to 2006.
Hints can come in the timing of a sale of summer dresses, for example. If the sale happens a few weeks early, that might indicate demand is weak, which would force retailers to cut prices to liquidate inventories. Indicators such as the consumer price index are also pulled apart, so policy makers get timely analysis on an internal Web site.
`Shock' the Forecast
Fed Chairman Ben S. Bernanke has also stepped up emphasis on simulations where computer models ``shock'' a forecast with a ``what if'' question. What if oil rises to $200 a barrel? What if the benchmark interest rate stays at 2 percent for all of 2009? Policy makers may see as many as 10 alternative simulations in the ``Green Book,'' the main forecast document presented at FOMC meetings.
More clues come in the ``Beige Book'' survey of economic conditions in the 12 Federal Reserve districts prepared ahead of each FOMC meeting. The survey for the Aug. 5 meeting, released today, said all 12 districts reported ``elevated or increasing'' price pressures during June and July amid rising costs for fuel, metals and food.
Fed economists know a lot about what drives inflation indexes higher; they know little about how those moves affect the attitudes of households and businesses. That question has become one of the most important research issues at the Fed.
Beatty's family is behaving the way Fed officials expect most Americans will, shifting consumption to accommodate higher grocery and fuel bills. As expenses chew up disposable income and weaken total demand, there's less inflationary pressure on prices for goods and services aside from food and energy.
Circle of Demands
The scenario is based on the fragile assumption that households and businesses don't begin to translate what they see happening in food and energy into a sense of where other prices are going. That would begin a circle of demands for higher compensation, and still higher prices.
``What could go wrong here, and it is really a potential risk, is the influence of inflationary expectations,'' said Mickey Levy, chief economist at Bank of America Corp. in New York. ``People are quickly coming to the realization that these energy prices are here to stay.''
Crude oil prices have surged 71 percent in the past year, reaching a record of $147.27 this month.
Former Richmond Fed President J. Alfred Broaddus Jr. said the Fed's dilemma is the most difficult of the past 30 years.
``There are lots of downside risks to growth,'' he said. ``But if you see inflation expectations getting some momentum, you have to act.''
Inflation Expectations
American consumers foresee average annual inflation of 3.4 percent over the next five years, the highest expectation since 1995, according to the Reuters/University of Michigan survey. Consumer prices climbed 5 percent in June from a year earlier.
Prices for milk and gasoline ``are already affecting inflation expectations,'' said Mark Spindel, chief investment officer at Potomac River Capital LLC, a Washington hedge fund. Those expectations could ``become entrenched in wage demands.''
The level of inflation that causes families like the Beattys to bargain for higher pay or switch jobs in search of better salaries is something Fed officials can only grasp through rough surveys or compensation data.
Beatty, who has already given the family food budget ``a 20 percent raise,'' said more price increases will result in deeper cuts, such as fewer music lessons for her kids.
Lifestyle Changes
``We could probably stand another 10 percent to 15 percent increase before we would have to dramatically cut into our standard of living,'' she said. She and her husband Greg, both 39, ``are definitely more willing to make lifestyle changes before we would add to the number of hours that either of us is outside the home working.''
Still, she said, they can't take much more of an increase in energy costs. Greg Beatty, a lawyer, recently took on a new assignment. If the job leads to more commuting, that could add $500 a month in gasoline costs and make them rethink how much money they need.
Sara Beatty said some families ``are already at the tipping point'' of needing more income to survive. ``I am grateful to be in the situation that I am, and not on the margin, where even another 5 percent increase in prices would be impossible to afford.''
``I am a really good shopper,'' said the Springfield, Virginia, mother of seven as she bought groceries on a hot July evening. She's making up for higher prices for staples such as bread, eggs and pasta by spending less on restaurant meals and entertainment. The family cut out a planned trip to Wisconsin because gasoline is too expensive.
A team of six Fed staff economists hunts down clues in advertisements, industry surveys and calls to retailers to determine how households like Beatty's are adjusting to soaring food and fuel costs. Their work will end up in a forecast for price indicators that the staff prepares for every meeting of the policy making Federal Open Market Committee.
``You use a fair amount of finesse, judgment, anecdotes and indicators,'' said Michael Feroli, an economist at JPMorgan Chase & Co. in New York, who tracked business investment for the Fed forecasting team from 2003 to 2006.
Hints can come in the timing of a sale of summer dresses, for example. If the sale happens a few weeks early, that might indicate demand is weak, which would force retailers to cut prices to liquidate inventories. Indicators such as the consumer price index are also pulled apart, so policy makers get timely analysis on an internal Web site.
`Shock' the Forecast
Fed Chairman Ben S. Bernanke has also stepped up emphasis on simulations where computer models ``shock'' a forecast with a ``what if'' question. What if oil rises to $200 a barrel? What if the benchmark interest rate stays at 2 percent for all of 2009? Policy makers may see as many as 10 alternative simulations in the ``Green Book,'' the main forecast document presented at FOMC meetings.
More clues come in the ``Beige Book'' survey of economic conditions in the 12 Federal Reserve districts prepared ahead of each FOMC meeting. The survey for the Aug. 5 meeting, released today, said all 12 districts reported ``elevated or increasing'' price pressures during June and July amid rising costs for fuel, metals and food.
Fed economists know a lot about what drives inflation indexes higher; they know little about how those moves affect the attitudes of households and businesses. That question has become one of the most important research issues at the Fed.
Beatty's family is behaving the way Fed officials expect most Americans will, shifting consumption to accommodate higher grocery and fuel bills. As expenses chew up disposable income and weaken total demand, there's less inflationary pressure on prices for goods and services aside from food and energy.
Circle of Demands
The scenario is based on the fragile assumption that households and businesses don't begin to translate what they see happening in food and energy into a sense of where other prices are going. That would begin a circle of demands for higher compensation, and still higher prices.
``What could go wrong here, and it is really a potential risk, is the influence of inflationary expectations,'' said Mickey Levy, chief economist at Bank of America Corp. in New York. ``People are quickly coming to the realization that these energy prices are here to stay.''
Crude oil prices have surged 71 percent in the past year, reaching a record of $147.27 this month.
Former Richmond Fed President J. Alfred Broaddus Jr. said the Fed's dilemma is the most difficult of the past 30 years.
``There are lots of downside risks to growth,'' he said. ``But if you see inflation expectations getting some momentum, you have to act.''
Inflation Expectations
American consumers foresee average annual inflation of 3.4 percent over the next five years, the highest expectation since 1995, according to the Reuters/University of Michigan survey. Consumer prices climbed 5 percent in June from a year earlier.
Prices for milk and gasoline ``are already affecting inflation expectations,'' said Mark Spindel, chief investment officer at Potomac River Capital LLC, a Washington hedge fund. Those expectations could ``become entrenched in wage demands.''
The level of inflation that causes families like the Beattys to bargain for higher pay or switch jobs in search of better salaries is something Fed officials can only grasp through rough surveys or compensation data.
Beatty, who has already given the family food budget ``a 20 percent raise,'' said more price increases will result in deeper cuts, such as fewer music lessons for her kids.
Lifestyle Changes
``We could probably stand another 10 percent to 15 percent increase before we would have to dramatically cut into our standard of living,'' she said. She and her husband Greg, both 39, ``are definitely more willing to make lifestyle changes before we would add to the number of hours that either of us is outside the home working.''
Still, she said, they can't take much more of an increase in energy costs. Greg Beatty, a lawyer, recently took on a new assignment. If the job leads to more commuting, that could add $500 a month in gasoline costs and make them rethink how much money they need.
Sara Beatty said some families ``are already at the tipping point'' of needing more income to survive. ``I am grateful to be in the situation that I am, and not on the margin, where even another 5 percent increase in prices would be impossible to afford.''
