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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.

  • Why Are Headline PCE and Median PCE Inflations So Far Apart?


    Daniel R Carroll Ross Cohen Kristiansen

    Abstract

    Mean (or headline) PCE inflation has typically fallen below median PCE inflation, and since 2012 the difference has been large. To understand the reasons for this trend, we investigate which components of the headline measure are contributing to the difference. We find that energy components, which frequently undergo wide price swings, and electronics, which have been steadily decreasing in price for decades, explain most of the difference between the two inflation measures. We argue that the outsized impacts of such components on headline PCE inflation reinforce the need for policymakers to consider both headline and median PCE inflation measures.  Read More

  • 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

Inflation-Related Working Papers

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

  • WP 20-35 | Macroeconomic Changes with Declining Trend Inflation: Complementarity with the Superstar Firm Hypothesis


    Takushi Kurozumi Willem Van Zandweghe

    Abstract

    Recent studies indicate that, since 1980, the average markup and the profit share of income have increased, while the labor share and the investment share of spending have decreased. We examine the role of monetary policy in these changes as inflation has concurrently trended down. In a simple staggered price model with a non-CES aggregator of differentiated goods, a decline in trend inflation as measured since 1980 can account for a substantial portion of the changes. Moreover, introducing a rise in the productivity of “superstar firms” in the model can better explain not only the macroeconomic changes but also the micro evidence on the distribution of firms’ markups, including the flat median markup.  Read More

  • WP 20-31 | Real-Time Density Nowcasts of US Inflation: A Model-Combination Approach


    Edward Knotek II Saeed Zaman

    Abstract

    We develop a flexible modeling framework to produce density nowcasts for US inflation at a trading-day frequency. Our framework: (1) combines individual density nowcasts from three classes of parsimonious mixed-frequency models; (2) adopts a novel flexible treatment in the use of the aggregation function; and (3) permits dynamic model averaging via the use of weights that are updated based on learning from past performance. Together these features provide density nowcasts that can accommodate non-Gaussian properties. We document the competitive properties of the nowcasts generated from our framework using high-frequency real-time data over the period 2000-2015.  Read More

  • WP 20-26 | Average Inflation Targeting and Household Expectations


    Olivier Coibion Yuriy Gorodnichenko Edward Knotek II Raphael Schoenle

    Abstract

    Using a daily survey of U.S. households, we study how the Federal Reserve’s announcement of its new strategy of average inflation targeting affected households’ expectations. Starting with the day of the announcement, there is a very small uptick in the minority of households reporting that they had heard news about monetary policy relative to prior to the announcement, but this effect fades within a few days. Those hearing news about the announcement do not seem to have understood the announcement: they are no more likely to correctly identify the Fed’s new strategy than others, nor are their expectations different. When we provide randomly selected households with pertinent information about average inflation targeting, their expectations still do not change in a different way than when households are provided with information about traditional inflation targeting.  Read More