Common and Idiosyncratic Inflation

No 2020-024, Finance and Economics Discussion Series from Board of Governors of the Federal Reserve System (U.S.)

Abstract: We use a dynamic factor model to disentangle changes in prices due to economy-wide (common) shocks, from changes in prices due to idiosyncratic shocks. Using 146 disaggregated individual price series from the U.S. PCE price index, we find that most of the fluctuations in core PCE prices observed since 2010 have been idiosyncratic in nature. Moreover, we find that common core inflation responds to economic slack, while the idiosyncratic component does not. That said, even after filtering out idiosyncratic factors, the estimated Phillips curve is extremely flat post-1995. Therefore, our results suggest that the flattening of the Phillips curve is the result of macroeconomic forces.

Keywords: Core inflation; Dynamic factor model; Disaggregated consumer prices; Monetary policy (search for similar items in EconPapers)
JEL-codes: C32 C43 C55 E31 E37 (search for similar items in EconPapers)
Pages: 52 p.
Date: 2020-03-05
New Economics Papers: this item is included in nep-cba, nep-gen, nep-mac and nep-mon
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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Related works:
Working Paper: Common and Idiosyncratic Inflation (2020)
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Persistent link: https://EconPapers.repec.org/RePEc:fip:fedgfe:2020-24

DOI: 10.17016/FEDS.2020.024

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