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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.

  • The CPI–PCEPI Inflation Differential: Causes and Prospects

    Wesley Janson Randal J Verbrugge Carola Conces Binder


    The Federal Open Market Committee’s inflation target is stated in terms of the personal consumption expenditures price index (PCEPI). The PCEPI, like the consumer price index (CPI), measures inflation in the expenditures of households, but these indexes differ in purpose, scope, and construction. Notably, since the CPI is used as the reference rate for numerous financial contracts, one can derive implied longer-run CPI inflation forecasts from financial contracts. Such forecasts are widely reported. But if policymakers are to use these forecasts to guide their pursuit of the inflation target, they need to translate these CPI inflation forecasts into corresponding implied PCEPI forecasts. Since 1978, CPI inflation has averaged 0.3 percentage points above PCEPI inflation, but this differential has varied significantly over time. In this Commentary, we explain why, investigate a key historical episode, and provide an updated estimate of the likely differential going forward.  Read More

  • A Forecasting Assessment of Market-Based PCE Inflation

    Mark Bognanni


    This article explores the potential for market-based inflation measures to improve inflation forecasting. To do so, I compare the pseudo-real time forecasting performance of a suite of models for forecasting total or “headline” PCE inflation over the short and medium run. In the forecasting exercise, a simple model using only market-based core PCE inflation showed the best forecasting performance at all horizons.  Read More

  • Inflation: Drivers and Dynamics 2019 Conference Summary

    Andres Blanco Mina Kim Edward Knotek II Matthias Paustian Robert W Rich Jane Ryngaert Raphael Schoenle Joris Tielens Henning Weber Michael Weber Mirko Wiederholt Tony Zhang


    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: “Inflation: Drivers and Dynamics.” This Commentary summarizes the papers presented at the 2019 conference.  Read More

Inflation-Related Working Papers

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

  • WP 16-02R | Downward Nominal Wage Rigidity in the United States during and after the Great Recession

    Bruce Fallick Daniel Villar William Wascher

    Original Paper: WP 16-02


    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 the United States and no evidence that the high degree of labor market distress during the Great Recession reduced downward nominal wage rigidity. We further find a lower degree of nominal rigidity at multi-year horizons.  Read More

  • WP 19-25 | The Propagation of Monetary Policy Shocks in a Heterogeneous Production Economy

    Ernesto Pasten Raphael Schoenle Michael Weber

    Revisions: WP 19-25R


    Realistic heterogeneity in price rigidity interacts with heterogeneity in sectoral size and input-output linkages in the transmission of monetary policy shocks. Quantitatively, heterogeneity in price stickiness is the central driver for real effects. Input-output linkages and consumption shares alter the identity of the most important sectors to the transmission. Reducing the number of sectors decreases monetary non-neutrality with a similar impact response of inflation. Hence, the initial response of inflation to monetary shocks is not sufficient to discriminate across models and ignoring heterogeneous consumption shares and input-output linkages identifies the wrong sectors from which the real effects originate.  Read More

  • WP 19-23 | The Roles of Price Points and Menu Costs in Price Rigidity

    Edward Knotek II


    Macroeconomic models often generate nominal price rigidity via menu costs. This paper provides empirical evidence that treating menu costs as a structural explanation for sticky prices may be spurious. Using scanner data, I note two empirical facts: (1) price points, embodied in nine-ending prices, account for approximately two-thirds of prices; and (2) at the conclusion of sales, post-sale prices return to their pre-sale levels more than three-fourths of the time. I construct a model that nests roles for menu costs and price points and estimate model variants. Excluding the two facts yields a statistically and economically significant role for menu costs in generating price rigidity. Incorporating the two facts yields an incentive to set nine-ending prices two orders of magnitude larger than the menu costs. In this setting, the price point model can match the two stylized facts, but menu costs are effectively irrelevant as a source of price rigidity. The choice of a mechanism for price rigidity matters for aggregate dynamics.  Read More