Title: Relative prices and pure inflation since the mid-1990s
Authors: Matteo Luciani - Amazon.com (United States) [presenting]
Hie Joo Ahn - Federal Reserve Board (United States)
Abstract: Consumer price inflation is decomposed into pure inflation, relative price inflation, and idiosyncratic inflation by estimating a dynamic factor model on a data set of 146 monthly disaggregated prices from 1995 to 2019. We find pure inflation is the trend around which PCE price inflation fluctuates. In contrast, 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.