Understanding Trend Inflation Through the Lens of the Goods and Services Sectors

74 Pages Posted: 21 Jan 2021

See all articles by Yunjong Eo

Yunjong Eo

Department of Economics, Korea University

Luis Uzeda

Bank of Canada

Benjamin Wong

Monash University - Department of Econometrics & Business Statistics

Date Written: October 23, 2020

Abstract

We distinguish between the goods and services sectors in an otherwise standard unobserved components model of US inflation. Our main finding is that, while both sectors used to contribute to the overall variation in aggregate trend inflation, since the 1990s this variation has been driven almost entirely by the services sector. Two changes in sector-specific inflation dynamics are responsible for this finding: (i) a large fall in the variance of trend goods inflation; and (ii) the disappearance of co-movement between trend goods and trend services inflation. Extensions to our baseline analysis by excluding energy prices and decomposing trend inflation into a common and a relative price component suggest a possible role of monetary policy in explaining our empirical findings. We also document similar changes in inflation dynamics internationally when extending our analysis to Australia and Canada.

Keywords: sectoral trend inflation; monetary policy; unobserved components model; disaggregated inflation

JEL Classification: C11; C32; E31; E52

Suggested Citation

Eo, Yunjong and Uzeda, Luis and Wong, Benjamin, Understanding Trend Inflation Through the Lens of the Goods and Services Sectors (October 23, 2020). Available at SSRN: https://ssrn.com/abstract=3717699 or http://dx.doi.org/10.2139/ssrn.3717699

Yunjong Eo (Contact Author)

Department of Economics, Korea University ( email )

1 Anam-dong 5 ka
Seoul, 136-701
Korea, Republic of (South Korea)

Luis Uzeda

Bank of Canada ( email )

234 Wellington Street
Ontario, Ottawa K1A 0G9
Canada

Benjamin Wong

Monash University - Department of Econometrics & Business Statistics ( email )

Wellington Road
Clayton, Victoria 3168
Australia

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