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Presentation to the
Society of Actuaries
September 7, 2022
Bob Arnold
Macroeconomic Analysis Division
How CBO Forecasts Inflation
1
Background
§ Inflation: A rise in the overall price level, measured using a price index, and
usually expressed as an annual rate of change.
§ Overall Inflation
– GDP Price Index
§ Consumer Price Inflation
– CPI-U: Consumer Price Index for All Urban Consumers
– PCEPI: Personal Consumption Expenditure Price Index
§ Core Consumer Price Inflation
– CPI excluding food and energy
– PCEPI excluding food and energy
– Trimmed mean CPI and median CPI (Federal Reserve Bank of Cleveland)
– “Sticky-price” CPI (Federal Reserve Bank of Atlanta)
2
Inflation is measured from the fourth quarter of one calendar year to the fourth quarter of the next.
PCE and Core PCE Inflation
3
The Phillips Curve
π! = απ"
+ β U! − U∗
+ 𝛾𝑍$ + 𝜖$
• Where πt = inflation (for example, the percentage change in PCEPI)
πe = expected inflation
Ut = unemployment rate
U* = noncyclical rate of unemployment
Zt = supply-shock variables (for example, energy and import prices; productivity
growth)
• Factors: inflation expectations, economic slack, and supply shocks
• Focus: Beta parameter ( β )
– Determines how sensitive inflation is to slack
– Unemployment gap (Ut – U*) is a measure of labor market slack
4
The unemployment gap is the difference between the unemployment rate and the noncyclical rate of unemployment. Core PCE inflation is measured as the rate of growth from one
quarter to the next, annualized. The change in inflation is calculated as the difference in inflation from one quarter to the next.
The Unemployment Gap and the Change in Core PCE Inflation
5
The unemployment gap is the difference between the unemployment rate and the noncyclical rate of unemployment. Housing services inflation is measured as the rate of growth from
one quarter to the next, annualized. The change in inflation is calculated as the difference in inflation from one quarter to the next.
Unemployment Gap and the Change in Inflation in
Housing Services
6
For 2017 through 2021, inflation is calculated from the fourth quarter of one calendar year to the fourth quarter of the next. For the first half of 2022, inflation is calculated from the
fourth quarter of 2021 to the second quarter of 2022, annualized.
Contributions to the Change in PCE Inflation
7
Inflation is measured from the fourth quarter of one calendar year to the fourth quarter of the next.
A Comparison of CBO’s Forecasts of Inflation With Those in the
Survey of Professional Forecasters

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How CBO Forecasts Inflation

  • 1. Presentation to the Society of Actuaries September 7, 2022 Bob Arnold Macroeconomic Analysis Division How CBO Forecasts Inflation
  • 2. 1 Background § Inflation: A rise in the overall price level, measured using a price index, and usually expressed as an annual rate of change. § Overall Inflation – GDP Price Index § Consumer Price Inflation – CPI-U: Consumer Price Index for All Urban Consumers – PCEPI: Personal Consumption Expenditure Price Index § Core Consumer Price Inflation – CPI excluding food and energy – PCEPI excluding food and energy – Trimmed mean CPI and median CPI (Federal Reserve Bank of Cleveland) – “Sticky-price” CPI (Federal Reserve Bank of Atlanta)
  • 3. 2 Inflation is measured from the fourth quarter of one calendar year to the fourth quarter of the next. PCE and Core PCE Inflation
  • 4. 3 The Phillips Curve π! = απ" + β U! − U∗ + 𝛾𝑍$ + 𝜖$ • Where πt = inflation (for example, the percentage change in PCEPI) πe = expected inflation Ut = unemployment rate U* = noncyclical rate of unemployment Zt = supply-shock variables (for example, energy and import prices; productivity growth) • Factors: inflation expectations, economic slack, and supply shocks • Focus: Beta parameter ( β ) – Determines how sensitive inflation is to slack – Unemployment gap (Ut – U*) is a measure of labor market slack
  • 5. 4 The unemployment gap is the difference between the unemployment rate and the noncyclical rate of unemployment. Core PCE inflation is measured as the rate of growth from one quarter to the next, annualized. The change in inflation is calculated as the difference in inflation from one quarter to the next. The Unemployment Gap and the Change in Core PCE Inflation
  • 6. 5 The unemployment gap is the difference between the unemployment rate and the noncyclical rate of unemployment. Housing services inflation is measured as the rate of growth from one quarter to the next, annualized. The change in inflation is calculated as the difference in inflation from one quarter to the next. Unemployment Gap and the Change in Inflation in Housing Services
  • 7. 6 For 2017 through 2021, inflation is calculated from the fourth quarter of one calendar year to the fourth quarter of the next. For the first half of 2022, inflation is calculated from the fourth quarter of 2021 to the second quarter of 2022, annualized. Contributions to the Change in PCE Inflation
  • 8. 7 Inflation is measured from the fourth quarter of one calendar year to the fourth quarter of the next. A Comparison of CBO’s Forecasts of Inflation With Those in the Survey of Professional Forecasters