Open AccessRelative prices and pure inflation since the mid-1990s
Author(s) -
Hie Joo Ahn,
Matteo Luciani
Publication year - 2021
Publication title -
finance and economics discussion series
Language(s) - English
Resource type - Journals
eISSN - 2767-3898
pISSN - 1936-2854
DOI - 10.17016/feds.2021.069
Subject(s) - relative price , economics , inflation (cosmology) , producer price index , watson , real interest rate , monetary economics , econometrics , price level , indexation , keynesian economics , monetary policy , mid price , physics , natural language processing , theoretical physics , computer science
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.