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Inflation persistence: alternative interpretations and policy implications
In this paper, I consider the policy implications of two alternative structural interpretations of observed inflation persistence, which correspond to two alternative specifications of the new Keynesian Phillips curve (NKPC). The first specification allows for some degree of intrinsic persistence by way of a lagged inflation term in the NKPC. The second is a purely forward-looking model, in which expectations farther into the future matter and coefficients are time-varying. In this specification, most of the observed inflation persistence is attributed to fluctuations in the underlying ...
Report
Sectoral inflation and the Phillips curve: what has changed since the Great Recession?
Using sectoral data at a medium level of aggregation, we find that price changes became less responsive to aggregate unemployment around 2009?2010. The slopes of the disaggregated Phillips curves diminished in many sectors, including housing and some services. We also document a decrease in sectoral inflation persistence, suggesting an increase in the weight of the forward-looking inflation expectation component and a decrease in the weight of the backward-looking component.
Discussion Paper
The Layers of Inflation Persistence
In a recent post, we introduced the Multivariate Core Trend (MTC), a measure of inflation persistence in the core sectors of the personal consumption expenditure (PCE) price index. With data up to February 2022, we used the MCT to interpret the nature of post-pandemic price spikes, arguing that inflation dynamics were dominated by a persistent component largely common across sectors, which we estimated at around 5 percent. Indeed, over the year, inflation proved to be persistent and broad based, and core PCE inflation is likely to end 2022 near 5 percent. So, what is the MCT telling us today? ...
Working Paper
An Alternative Measure of Core Inflation: The Trimmed Persistence PCE Price Index
I introduce the "trimmed persistence PCE," a new measure of core inflation in which component prices are weighted according to the time-varying persistence of their price changes. The components of trimmed persistence personal consumption expenditures (PCE) display less tendency to mechanically pass-through the level of the prior period's inflation to the current period; thus, the impact of the current stance of monetary policy and real economic factors are more likely to be visible in recent trimmed persistence inflation compared to headline inflation. Trimmed persistence inflation performs ...
Discussion Paper
Inflation Persistence—An Update with December Data
This post presents an updated estimate of inflation persistence, following the release of personal consumption expenditure (PCE) price data for December 2022. The estimates are obtained by the Multivariate Core Trend (MCT), a model we introduced on Liberty Street Economics last year and covered most recently in a January post. The MCT is a dynamic factor model estimated on monthly data for the seventeen major sectors of the PCE price index. It decomposes each sector’s inflation as the sum of a common trend, a sector-specific trend, a common transitory shock, and a sector-specific transitory ...
Report
The macroeconomics of trend inflation
Most macroeconomic models for monetary policy analysis are approximated around a zero inflation steady state, but most central banks target an inflation rate of about 2 percent. Many economists have recently proposed even higher inflation targets to reduce the incidence of the zero lower bound constraint on monetary policy. In this survey, we show that the conduct of monetary policy should be analyzed by appropriately accounting for the positive trend inflation targeted by policymakers. We first review empirical research on the evolution and dynamics of U.S. trend inflation and some proposed ...
Report
The Distribution of Sectoral Price Changes and Recent Inflation Developments
Inflation has declined across many sectors so far in 2023, but the distribution of sectoral price changes still shows atypical features, such as bimodality in which substantial masses of sectors record price changes both below and above the Federal Reserve’s 2 percent inflation target. Such bimodality was not typical before the pandemic, suggesting that sector-specific price adjustments are now playing a more important role in inflation developments. The recent slowdown in inflation was partly caused by a larger-than-normal share of the consumption basket being located in the left tail of ...
Report
Are the Demand and Supply Channels of Inflation Persistent? Evidence from a Novel Decomposition of PCE Inflation
Using highly disaggregated personal consumption expenditures data, I analyze whether the recent inflation run-up is explained by supply shocks more than by demand shocks, and whether these demand and supply shocks are likely persistent or transitory. I develop a new decomposition method that enables me to classify inflation in disaggregated consumption categories as being driven predominantly by persistent supply shocks, transitory supply shocks, transitory demand shocks, or persistent demand shocks. Similar to other recent analyses, this brief finds that both demand and supply shocks are ...
Working Paper
Shocks, Frictions, and Policy Regimes: Understanding Inflation after the COVID-19 Pandemic
We set- up a two-sector New Keynesian model with input-output linkages to study the persistently high inflation during the post-COVID-19 period. We include multiple shocks as well as several amplification channels of these shocks in a parsimonious model to quantify the relative importance of each factor. We calibrate the model to match the pre-COVID-19 data and alter parameters governing 1) the fiscal rule, 2) inflation feedback in the monetary policy rule, 3) elasticity of substitution among intermediary inputs in production, and 4) the size of a sectoral demand shift shock to explain the ...
Discussion Paper
Inflation Persistence: Dissecting the News in January PCE Data
This post presents updated estimates of inflation persistence, following the release of personal consumption expenditure (PCE) price data for January 2023. The estimates are obtained by the Multivariate Core Trend (MCT), a model we introduced on Liberty Street Economics last year and covered most recently here and here. The MCT is a dynamic factor model estimated on monthly data for the seventeen major sectors of the PCE price index. It decomposes each sector’s inflation as the sum of a common trend, a sector-specific trend, a common transitory shock, and a sector-specific transitory shock. ...