Finance and Economics Discussion Series (FEDS)
October 2021
Relative prices and pure inflation since the mid-1990s
Hie Joo Ahn and Matteo Luciani
Abstract:
This paper decomposes consumer price inflation into pure inflation, relative price inflation, and idiosyncratic inflation by estimating a dynamic factor model á la Reis and Watson (2010) on a data set of 146 monthly disaggregated prices from 1995 to 2019. We find that pure inflation is the trend around which PCE price inflation fluctuates, while relative price inflation and idiosyncratic inflation drive the fluctuation of PCE price inflation around the trend. Unlike Reis and Watson, we find that labor market slack is the main driver of pure inflation and that energy prices account for variation in relative price inflation.
Accessible materials (.zip)
Keywords: Pure inflation, relative price inflation, Phillips correlation, dynamic factor model, disaggregated consumer prices, monetary policy
DOI: https://doi.org/10.17016/FEDS.2021.069
PDF: Full Paper
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