Common and Idiosyncratic Inflation
52 Pages Posted: 18 May 2020
Date Written: March 5, 2020
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
JEL Classification: C32; C43; C55; E31; E37
Suggested Citation: Suggested Citation