Discussion Paper

New tools to monitor inflation in real time

Abstract: From 1995 through February 2020 – a period when inflation was relatively low and stable – the rate of monthly total Personal Consumption Expenditures (PCE) inflation was tightly related to a measure of asymmetry in the distribution of price changes of its subcomponents. We document that relationship and use it to construct an "inflation Filter" to distinguish inflation that is broad-based from that which is idiosyncratic (explained by price changes in a small share of subcomponents). Our "Inflation Filter" can be viewed as a standard diffusion index in which the threshold each month is set equal to that month's inflation rate, allowing it to vary through time. In contrast to standard diffusion indexes that use an ad hoc time-invariant threshold, our approach generates considerable explanatory power for the rate of inflation in the pre-COVID period. This makes it useful for evaluating in real time whether inflation is returning to pre-pandemic norms.

https://doi.org/10.17016/2380-7172.3617

Bibliographic Information

Provider: Board of Governors of the Federal Reserve System (U.S.)

Part of Series: FEDS Notes

Publication Date: 2024-12-20

Number: 2024-12-20-3