How Has Inflation Measured Up Against Projections?

Jun 14
11:00

2012

Shelby McCarthy

Shelby McCarthy

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More generally, resource utilization was expected to remain high and greater pressures could emerge in labor and product markets. Members noted that o...

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More generally,How Has Inflation Measured Up Against Projections? Articles resource utilization was expected to remain high and greater pressures could emerge in labor and product markets. Members noted that one broad measure of wages had picked up and that there was a small rise in the number of anecdotal reports indicating that labor shortages were contributing to higher wages in some parts of the country. In addition, unusually muted increases in the costs of worker benefits had been holding down overall compensation costs, and this pattern might not persist.

On the other hand, high levels of resource utilization had been associated for some time with lower rates of growth in costs than would have been anticipated on the basis of historical experience. In particular, a general sense of job insecurity in a period of major business restructurings was holding down increases in labor compensation. In an environment of strong competition, which was preventing many businesses from passing on rising costs through higher prices, firms continued to focus on efforts to control costs by improving the efficiency of their operations, and this was helping to hold down inflation. An apparent decline in inflationary expectations also would provide a moderating influence on inflation trends in the period ahead.

While most of the members saw little reason to anticipate appreciably lower inflation over the year ahead, they also viewed the odds on a pickup in inflation as fairly low; they could see possible reasons for optimism on the long-run trend in inflation; and they generally remained confident that further progress toward price stability would be made over the longer term.
In keeping with the requirements of the Full Employment and Balanced Growth Act of 1978 (the Humphrey-Hawkins Act), the Committee reviewed the ranges for growth of the monetary and debt aggregates that it had established on a tentative basis at its meeting in July.

The tentative ranges included expansion of 1 to 5 percent for M2 and 2 to 6 percent for M3, measured from the third quarter to the fourth quarter. The monitoring range for growth of total domestic nonfinancial debt was provisionally set at 3 to 7 percent. The tentative ranges were unchanged from the actual ranges for last year. In July, the range for M3 had been raised by two percentage points to reflect developments that seemed to be fostering a return to the historical pattern of somewhat faster growth in M3 than in M2.

In their discussion, the members took note of a staff analysis which indicated that monetary expansion consistent with the moderate growth of nominal GDP that the members were projecting most likely would be around the upper ends of the tentative ranges adopted last July. M2 and M3 velocity over the past couple of years had conformed more closely on balance with historical patterns, and the projections assumed that this behavior would continue. In light of the experience of earlier years, however, when the velocities of these aggregates had exhibited pronounced atypical behavior, substantial uncertainty still surrounded any projections of monetary expansion and the linkage between particular rates of money growth and the basic objectives of monetary policy.