Post-COVID Inflation Dynamics: Higher for Longer
We implement a novel nonlinear structural model featuring an empirically-successful frequency-dependent and asymmetric Phillips curve; unemployment frequency components interact with three components of core PCE – core goods, housing, and core services ex-housing – and a variable capturing supply shocks. Forecast tests verify model’s accuracy in its unemployment-inflation tradeoffs, crucial for monetary policy. Using this model, we assess the plausibility of the December 2022 Summary of Economic Projections (SEP). By 2025Q4, the SEP projects 2.1 percent inflation; however, conditional on the SEP unemployment path, we project inflation of 2.9 percent. A fairly deep recession delivers the SEP inflation path, but a simple welfare analysis rejects this outcome.
Verbrugge, Randal J., and Saeed Zaman. 2023. “Post-COVID Inflation Dynamics: Higher for Longer.” Federal Reserve Bank of Cleveland, Working Paper No. 23-06R. https://doi.org/10.26509/frbc-wp-202306r