Search Results
Working Paper
Tracking Trend Inflation: Nonseasonally Adjusted Variants of the Median and Trimmed-Mean CPI
We make five contributions. We demonstrate that extant trimmed-mean and median CPI construction procedures depart from Bureau of Labor Statistics index construction procedures, and that the departures don't make much of a difference. We produce nonseasonally adjusted variants of the trimmed-mean CPI and median CPI, and demonstrate that these are useful real-time estimates of trend inflation; the NSA median CPI outperforms the median CPI, but both SA and NSA variants of the median and the trimmed-mean CPI easily dominate the so-called "core" CPI. We introduce superior ex post measures of trend ...
Working Paper
Improving the Median CPI: Maximal Disaggregation Isn't Necessarily Optimal
Median Consumer Price Indexes have proved useful in many contexts and are used worldwide as key policymaking inputs. Historically, US Median CPI improvements involved increasing the CPI component level of disaggregation; one might reasonably assume that further disaggregation would lead to further improvements. We theoretically demonstrate herein: not necessarily. We then empirically explore the impact of further disaggregation. Substantially more disaggregation in the shelter indexes and slightly more disaggregation in the remaining components improve the ability of Median CPI to track the ...
Discussion Paper
Inflation Persistence: How Much Is There and Where Is It Coming From?
The surge in inflation since early 2021 has sparked intense debate. Would it be short-lived or prove to be persistent? Would it be concentrated within a few sectors or become broader? The answers to these questions are not so clear-cut. In our view, one should ask how much of the inflation is persistent and how much of it is broad-based. In this post, we address this question through a quantitative lens. We find that the large ups and downs in inflation over the course of 2020 were largely the result of transitory shocks, often sector-specific. In contrast, sometime in the fall of 2021, ...
Working Paper
A Theory of Intrinsic Inflation Persistence
We propose a novel theory of intrinsic inflation persistence by introducing trend inflation and variable elasticity of demand in a model with staggered price and wage setting. Under nonzero trend inflation, the variable elasticity generates intrinsic persistence in inflation through a measure of price dispersion stemming from staggered price setting. It also introduces intrinsic persistence in wage inflation under staggered wage setting, which affects price inflation. With the theory we show that inflation exhibits a persistent, hump-shaped response to a monetary policy shock. We also show ...
Working Paper
A New Model of Inflation, Trend Inflation, and Long-Run Inflation Expectations
A knowledge of the level of trend inflation is key to many current policy decisions, and several methods of estimating trend inflation exist. This paper adds to the growing literature which uses survey-based long-run forecasts of inflation to estimate trend inflation. We develop a bivariate model of inflation and long-run forecasts of inflation which allows for the estimation of the link between trend inflation and the long-run forecast. Thus, our model allows for the possibilities that long-run forecasts taken from surveys can be equated with trend inflation, that the two are completely ...
Briefing
What Does Sectoral Inflation Tell Us About the Aggregate Trend in Inflation?
To know the appropriate stance of monetary policy, policymakers need to determine the overall trend in inflation. This is challenging in the face of varied and evolving patterns in inflation across sectors. We describe a multisector statistical model that provides a systematic approach to appropriately weight incoming inflation data from each sector. By flexibly applying time-varying weights to different sectors, this model adjusts to changing patterns in these sectors over time — including during the pandemic — and suggests that trend inflation is lower than might be suggested by the ...
Working Paper
Monetary Policy, Trend Inflation and the Great Moderation: An Alternative Interpretation - Comment
Working with a small-scale calibrated New-Keynesian model, Coibion and Gorodnichenko (2011) find that the reduction in trend inflation during Volcker's mandate was a key factor behind the Great Moderation. We revisit this finding with an estimated New-Keynesian model with trend inflation and no indexation based on Christiano, Eichenbaum and Evans (2005). First, our simulations confirm Coibion and Gorodnichenko's (2011) main finding. Second, we show that a trend inflation-immune Taylor rule based on economic theory can avoid indeterminacy even at high levels of trend inflation such as those ...
Working Paper
A New Model of Trend Inflation Using Disaggregates, Survey Expectations, and Uncertainty
This paper develops a new empirical model that estimates trend inflation by combining modeling features that have advanced the literature on trend inflation over the past two decades. These features include incorporating information about long-term inflation expectations from surveys in a flexible way, modeling aggregate inflation via sectoral data (goods and services), allowing for stochastic volatility (SV) in the shocks to the trend and transitory components of inflation, allowing for a time-varying price Phillips curve, and allowing for time-varying uncertainty effects on the level of ...
Journal Article
Measures of “Trend” Inflation
Economists strive to measure trend inflation because it is a potentially useful guideline for predicting future inflation. But the various methods used can deviate considerably over time.
Working Paper
Improving the Median CPI: Maximal Disaggregation Isn't Necessarily Optimal
For decades, the Federal Reserve Bank of Cleveland (FRBC) has produced the Median Consumer Price Index (CPI). It has proven useful in various contexts, such as forecasting and understanding post-COVID inflation dynamics. Historically, revisions/improvements to the FRBC methodology have involved increasing the level of disaggregation in the CPI components. Thus, it may be reasonable to assume that further disaggregation improves the properties of the median CPI. We theoretically demonstrate: not necessarily. We then empirically explore the impact of further disaggregation by examining fifteen ...