Summary of What’s Down with Inflation?

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What’s Down with Inflation? summary
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Recommendation

Between the end of the Great Recession in June 2009 and the close of 2017, inflation remained below the Federal Reserve’s 2% goal. Economists Tim Mahedy and Adam Shapiro explore the landscape of a low-inflation environment and the surprising factor behind it. Whether the 0.5% rise in consumer prices in January 2018 signals the start of an inflationary trend or turns out to be a short-term spike is unclear, but getAbstract nonetheless recommends this astute report to analysts, economists and executives interested in what drives inflation.

In this summary, you will learn

  • Why inflation has lagged the Federal Reserve’s 2% threshold during the economic recovery,
  • What factors contribute to this dynamic and
  • What those aspects mean for future inflation trends.
 

About the Authors

Tim Mahedy is an associate economist at the Federal Reserve Bank of San Francisco, where Adam Shapiro is a research adviser.

 

Summary

Since the 2008 financial crisis, the Federal Reserve has pursued a policy benchmark for inflation – measured by “core personal consumption expenditures (PCE) prices” – of 2% annual growth. Despite years of highly accommodative monetary policy and a slow but steady labor market, inflation’s inability to meet the 2% threshold baffled economists. Central bankers turn to core elements of inflation to clarify this conundrum. They isolate “procyclical” forces – price levels associated with current economic conditions – from “acyclical” aspects, those unrelated to underlying economic trends. Modeling inflation targets based on PCE data demonstrates that 42% of the price level is procyclical, consisting of the costs of food, housing, recreation and some nondurable goods. Acyclical factors account for 58% of PCE, primarily in health care, financial services, apparel and transportation costs. Starting in 2014, procyclical inflation climbed as the economy rebounded, while acyclical inflation dropped. In this context, acyclical inflation components would appear to be the predominant causes of core PCE’s sluggishness.


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