Is there an inflation puzzle?

Abstract: This paper investigates the issue of an \\"inflation puzzle\\", or the lack of an acceleration in inflation during the current expansion. Our findings indicate that while inflation has appeared to be unusually low, we can account for this feature of the data over most of the current expansion. In particular, the results support the view that the weak increase in compensation growth during the period 1992-94 was a major contributor to the low level of inflation observed through late 1995. ; More recently, however, there is evidence of an anomaly in the behavior of inflation. The out-of-sample forecasts from our price-inflation Phillips curve have been subject to over-predication errors for the last seven quarters. In addition, the forecasts from our estimated wage-inflation Phillips curve have closely tracked the movements in compensation growth over the last two years. These findings suggest that the appearance of an inflation puzzle can not be fully explained by either reduced growth in benefit costs or unusually slow wage growth.

Keywords: Inflation (Finance); Cafeteria benefit plans; Wages;

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Bibliographic Information

Provider: Federal Reserve Bank of New York

Part of Series: Research Paper

Publication Date: 1997

Number: 9723