Post-COVID Inflation Dynamics: Higher for Longer

RePEc Short ID: pve29
ORCID iD: 0000-0003-0276-447X

Verbrugge, Randal J.; Zaman, Saeed

doi:10.26509/frbc-wp-202306r

Working Paper Revision

Post-COVID Inflation Dynamics: Higher for Longer

Abstract: We implement a novel nonlinear structural model featuring an empirically-successful frequency-dependent and asymmetric Phillips curve; unemployment frequency components interact with three components of core PCE – core goods, housing, and core services ex-housing – and a variable capturing supply shocks. Forecast tests verify model’s accuracy in its unemployment-inflation tradeoffs, crucial for monetary policy. Using this model, we assess the plausibility of the December 2022 Summary of Economic Projections (SEP). By 2025Q4, the SEP projects 2.1 percent inflation; however, conditional on the SEP unemployment path, we project inflation of 2.9 percent. A fairly deep recession delivers the SEP inflation path, but a simple welfare analysis rejects this outcome.

Keywords: Nonlinear Phillips Curve; Frequency Decomposition; Supply Price Pressures; Structural VAR; Nonlinear Impulse Response Functions; Welfare Analysis;

JEL Classification: C32; E31; E32; E52;

https://doi.org/10.26509/frbc-wp-202306r