Relative Prices and Pure Inflation Since the Mid-1990s

18 Pages Posted: 16 Nov 2021

See all articles by Hie Joo Ahn

Hie Joo Ahn

Board of Governors of the Federal Reserve System

Matteo Luciani

Board of Governors of the Federal Reserve System

Date Written: October, 2021

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.

Keywords: Pure inflation, Relative price inflation, Phillips correlations, Dynamic factor model, Disaggregated consumer prices, Monetary policy

JEL Classification: C32, C43, C55, E31, E52

Suggested Citation

Ahn, Hie Joo and Luciani, Matteo, Relative Prices and Pure Inflation Since the Mid-1990s (October, 2021). FEDS Working Paper No. 2021-69, Available at SSRN: https://ssrn.com/abstract=3964354 or http://dx.doi.org/10.17016/FEDS.2021.069

Hie Joo Ahn (Contact Author)

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

Matteo Luciani

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

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