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Recent Inflation-Related Research

Inflation-Related Economic Commentary

Economic Commentary provides research, analysis, and perspectives on an economic topic or policy issue.

  • How Aggregation Matters for Measured Wage Growth


    Michael Morris Robert W Rich Joseph Tracy

    Abstract

    Wage growth is often measured by the change in average hourly earnings (AHE), a gauge of overall wages that aggregates information on earnings and hours worked across individuals. A close look at this aggregation method demonstrates that AHE growth reflects disproportionately the profile of high-earning workers who typically display lower and less cyclically sensitive wage growth. Using data from the Current Population Survey (CPS), we adopt a different aggregation method and compute wage growth as the average of individuals’ wage growth. The analysis indicates that the CPS measure of average wage growth is significantly higher than AHE growth and that it displays a more meaningful nonlinear relationship with the Congressional Budget Office’s unemployment gap. Last, our findings do not support the claim that there was hidden slack in the labor market during the recent expansion that was restraining wage growth.  Read More

  • Inflation: Drivers and Dynamics | 2019 CEBRA Annual Meeting Session Summary


    Timo Haber Edward Knotek II Jean-Paul LHuillier Julio Ortiz Damjan Pfajfar Robert W Rich Raphael Schoenle

    Abstract

    The relationship between the Phillips curve and inflation has become weaker over time, producing questions regarding how policymakers might connect inflation to the rest of the economy. Presentations given during the “Inflation: Drivers and Dynamics” session of the Central Bank Research Association’s annual meeting focused on the intersection of monetary policy and inflation dynamics to examine the ways in which policy might impact inflation and related expectations and processes. This Economic Commentary summarizes the papers presented during this session.  Read More

  • Consumers and COVID-19: A Real-Time Survey


    Edward Knotek II Raphael Schoenle Alexander M Dietrich Keith Kuester Gernot J Muller Kristian Ove R Myrseth Michael Weber

    Abstract

    We summarize the results from an ongoing survey that asks consumers questions related to the recent coronavirus outbreak, including their expectations for how the economy is likely to be affected by the outbreak and how their own behavior has changed in response to it. The survey began in early March, providing a window into how consumers’ responses have evolved in real time since the early days of the acknowledged spread of COVID-19 in the United States. In updating and charting the survey’s findings on the Cleveland Fed’s website going forward, we seek to inform policymakers and researchers about consumers’ beliefs during a time of high uncertainty and unprecedented policy responses.  Read More

Inflation-Related Working Papers

Working papers are preliminary versions of technical papers containing the results and discussions of current research.

  • WP 20-22 | Will COVID-19-Induced Rental Nonpayment Drive Large Reductions in Shelter Inflation? Hints from the Great Recession


    Wesley Janson Randal J Verbrugge

    Abstract

    The dramatic COVID-19-induced rise in unemployment has greatly increased uncertainty about the ability of renters to pay their rent. Ostensibly, a small increase in nonpayment incidence could sharply reduce shelter inflation. Will nonpayment during the current COVID collapse induce such a reduction? We estimate the nature of and change in nonpayment incidence over the Great Recession. Contrary to popular belief, most nonpayment does not translate into a $0 rent. Further, nonpayment incidence is acyclical and uncorrelated with neighborhood income. But some mismeasurement of nonpayment seems likely, threatening CPI accuracy; we offer suggestions to test and address mismeasurement, if present.  Read More

  • WP 20-20 | Output-Inflation Trade-offs and the Optimal Inflation Rate


    Takushi Kurozumi Willem Van Zandweghe

    Abstract

    In staggered price models, a non-CES aggregator of differentiated goods generates empirically plausible short- and long-run trade-offs between output and inflation: lower trend inflation flattens the Phillips curve and decreases steady-state output by increasing markups. We show that the aggregator reduces both the steady-state welfare cost of higher trend inflation and the inflation-related weight in a model-based welfare function for higher trend inflation. Consequently, optimal trend inflation is moderately positive even without considering the zero lower bound on nominal interest rates. Moreover, the welfare difference between 2 percent and 4 percent inflation targets is much smaller than in the CES aggregator case.  Read More

  • WP 20-16 | Raising the Inflation Target: How Much Extra Room Does It Really Give?


    Raphael Schoenle Jean-Paul LHuillier

    Abstract

    Some, but less than intended. The reason is a shift in the behavior of the private sector: Prices adjust more frequently, lowering the potency of monetary policy. We quantitatively investigate this channel across different models, based on a calibration using micro data. By raising the target from 2 percent to 4 percent, the monetary authority gets only between 0.51 and 1.60 percentage points of effective extra policy room for monetary policy (not 2 percentage points as intended). Getting 2 percentage points of effective extra room requires raising the target to more than 4 percent. Taking this channel into consideration raises the optimal inflation target by roughly 1 percentage points relative to earlier computations.  Read More