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Journal Article
Inflation: Drivers and Dynamics 2020 Conference Summary
To provide insights into the processes that drive inflationary dynamics, the Federal Reserve Bank of Cleveland holds an annual conference on the topic of inflation: the Inflation: Drivers and Dynamics series. The 2020 installment of the conference was held on May 21-22, 2020. This Commentary summarizes the papers at the conference, which broadly fell into four categories: (1) empirical Phillips curves, (2) networks and Phillips curves, (3) expectations formation, and (4) price-setting behavior and inflation.
Working Paper
Downward Nominal Wage Rigidity in the United States during and after the Great Recession
Rigidity in wages has long been thought to impede the functioning of labor markets. In this paper, we investigate the extent of downward nominal wage rigidity in US labor markets using job-level data from a nationally representative establishment-based compensation survey collected by the Bureau of Labor Statistics. We use several distinct methods to test for downward nominal wage rigidity and to assess whether such rigidity is less or more severe in the presence of negative economic shocks than in more normal economic times. We find a significant amount of downward nominal wage rigidity in ...
Working Paper
Inflation Since the Pandemic: Lessons and Challenges
This paper reviews the drivers of the post-pandemic U.S. inflation surge and subsequent decline, including the behavior and role of inflation expectations. The sharp rise in inflation reflected severe imbalances between supply and demand stemming from the shocks of the pandemic and the policy response. Measures of short-term inflation expectations increased alongside realized inflation, especially those of households and firms, which may have contributed to inflation’s persistence through price- and wage-setting behavior. However, measures of longer-term inflation expectations remained ...
Working Paper
Inflation since the Pandemic: Lessons and Challenges
This paper reviews the drivers of the post-pandemic U.S. inflation surge and subsequent decline, including the behavior and role of inflation expectations. The sharp rise in inflation reflected severe imbalances between supply and demand stemming from the shocks of the pandemic and the policy response. Measures of short-term inflation expectations increased alongside realized inflation, especially those of households and firms, which may have contributed to inflation's persistence through price- and wage-setting behavior. However, measures of longer-term inflation expectations remained ...
Working Paper
Retrospective on the Federal Reserve Board Staff's Inflation Forecast Errors since 2019
This paper examines the Board staff's inflation forecast misses over the years following the COVID-19 outbreak, focusing on a timeline of what staff members knew when and lessons learned along the way. The staff significantly underestimated both the size and persistence of the inflationary surge that followed the reopening of the U.S. economy. As a result, staff members made various changes to their forecasting procedures, including using new types of data to inform their assessment of supply-demand imbalances in product and labor markets and to guide their judgmental forecast. Throughout, an ...
Working Paper
Downward Nominal Wage Rigidity in the United States During and After the Great Recession
Rigidity in wages has long been thought to impede the functioning of labor markets. In this paper, we investigate the extent of downward nominal wage rigidity in US labor markets using job-level data from a nationally representative establishment-based compensation survey collected by the Bureau of Labor Statistics. We use several distinct methods to test for downward nominal wage rigidity and to assess whether such rigidity is less or more severe in the presence of negative economic shocks than in more normal economic times. We find a significant amount of downward nominal wage rigidity in ...
Working Paper
The Skewness of the Price Change Distribution : A New Touchstone for Sticky Price Models
We present a new way of empirically evaluating various sticky price models used to assess the degree of monetary non-neutrality. While menu cost models uniformly predict that price change skewness and dispersion fall with inflation, in the Calvo model both rise. However, CPI price data from the late 1970's onwards shows that skewness does not fall with inflation, while dispersion does. We develop a random menu cost model that, with a menu cost distribution that has a strong Calvo feature, can match the empirical patterns found. The model therefore exhibits much more monetary non-neutrality ...
Working Paper
Post-Pandemic Price Flexibility in the U.S.: Evidence and Implications for Price Setting Models
Using the micro data underlying the U.S. CPI, we document several findings about firm price-setting behavior during and following the Covid-19 pandemic, a period with the highest levels of inflation seen in around forty years. 1) The frequency of price change increased substantially as inflation took off, and has declined markedly as inflation has receded. 2) The average size of price changes also increased as price increases became more common, while the absolute value changed little. 3) The dispersion of price changes did not fall, contrary to the prediction of state-dependent models. 4) A ...
Discussion Paper
Wage and Income Growth Expectations Before, During, and After the Pandemic Period
Inflation expectations are understood to play a crucial role in inflation dynamics and in the conduct of monetary policy. Recently, there has also been a renewed interest in the relationship between inflation expectations and wages.
Discussion Paper
Price-Setting During the Covid Era
The Covid-19 pandemic has had enormous effects on every aspect of the economy, including inflation which has become one of the most pressing economic problems of the recovery period. Although inflation fell significantly at the onset of the pandemic, the increase seen since early 2021 has brought inflation to levels not seen since the 1980's.