Over the past two decades, U.S. core PCE goods and services inflation have evolved differently. Against the backdrop of global concerns of low inflation, we use this trend as motivation to develop a bottom-up model of U.S. inflation. We find that domestic forces play a larger role relative to foreign factors in influencing core services inflation, while foreign factors predominantly drive core goods price changes. When comparing forecasting performance, we find that both the aggregate Phillips curve and the bottom up approach give low root mean square errors. The latter, however, is more informative in tracing the effects of shocks and understanding the exact channels through which they affect aggregate inflation. Using scenario analysis—and given a relatively low sensitivity of core inflation to changes in slack, both at the aggregate Phillips curve and sub-components levels—we find that global pressures will likely keep core PCE inflation below 2 percent for the foreseeable future unless the dollar starts to depreciate markedly and the unemployment rate goes well below the natural rate. These results support the accommodative stance of monetary policy pursued thus far and, going forward, underscore the need for proceeding cautiously and very gradually in raising the federal funds rate.

Over the past two decades, U.S. core PCE goods and services inflation have evolved differently. Against the backdrop of global concerns of low inflation, we use this trend as motivation to develop a bottom-up model of U.S. inflation. We find that domestic forces play a larger role relative to foreign factors in influencing core services inflation, while foreign factors predominantly drive core goods price changes. When comparing forecasting performance, we find that both the aggregate Phillips curve and the bottom up approach give low root mean square errors. The latter, however, is more informative in tracing the effects of shocks and understanding the exact channels through which they affect aggregate inflation. Using scenario analysis - and given a relatively low sensitivity of core inflation to changes in slack, both at the aggregate Phillips curve and sub-components levels - we find that global pressures will likely keep core PCE inflation below 2 percent for the foreseeable future unless the dollar starts to depreciate markedly and the unemployment rate goes well below the natural rate. These results support the accommodative stance of monetary policy pursued thus far and, going forward, underscore the need for proceeding cautiously and very gradually in raising the federal funds rate.

Large price changes in industries affected by the COVID-19 pandemic have caused erratic fluctuations in the U.S. headline inflation rate. This paper compares alternative approaches to filtering out the transitory effects of these industry price changes and measuring the underlying or core level of inflation over 2020-2021. The Federal Reserve’s preferred measure of core, the inflation rate excluding food and energy prices (XFE), has performed poorly: over most of 2020-21, it is almost as volatile as headline inflation. Measures of core that exclude a fixed set of additional industries, such as the Atlanta Fed’s sticky-price inflation rate, have been less volatile, but the least volatile have been measures that filter out large price changes in any industry, such as the Cleveland Fed’s median inflation rate and the Dallas Fed’s trimmed mean inflation rate. These core measures have followed smooth paths, drifting down when the economy was weak in 2020 and then rising as the economy has rebounded. Overall, we find that the case for the Federal Reserve to move away from the traditional XFE measure of core has strengthened during 2020-21.

Controlling inflation is among the most important objectives of economic policy. By maintaining price stability, policy makers are able to reduce uncertainty, improve price-monitoring mechanisms, and facilitate more efficient planning and allocation of resources, thereby raising productivity. This volume focuses on understanding the causes of the Great Inflation of the 1970s and ’80s, which saw rising inflation in many nations, and which propelled interest rates across the developing world into the double digits. In the decades since, the immediate cause of the period’s rise in inflation has been the subject of considerable debate. Among the areas of contention are the role of monetary policy in driving inflation and the implications this had both for policy design and for evaluating the performance of those who set the policy. Here, contributors map monetary policy from the 1960s to the present, shedding light on the ways in which the lessons of the Great Inflation were absorbed and applied to today’s global and increasingly complex economic environment.

Inflation is regarded by the many as a menace that damages business and can only make life worse for households. Keeping it low depends critically on ensuring that firms and workers expect it to be low. So expectations of inflation are a key influence on national economic welfare. This collection pulls together a galaxy of world experts (including Roy Batchelor, Richard Curtin and Staffan Linden) on inflation expectations to debate different aspects of the issues involved. The main focus of the volume is on likely inflation developments. A number of factors have led practitioners and academic observers of monetary policy to place increasing emphasis recently on inflation expectations. One is the spread of inflation targeting, invented in New Zealand over 15 years ago, but now encompassing many important economies including Brazil, Canada, Israel and Great Britain. Even more significantly, the European Central Bank, the Bank of Japan and the United States Federal Bank are the leading members of another group of monetary institutions all considering or implementing moves in the same direction. A second is the large reduction in actual inflation that has been observed in most countries over the past decade or so. These considerations underscore the critical – and largely underrecognized - importance of inflation expectations. They emphasize the importance of the issues, and the great need for a volume that offers a clear, systematic treatment of them. This book, under the steely editorship of Peter Sinclair, should prove very important for policy makers and monetary economists alike.

Economic Policy and the Great Stagflation discusses the national economic policy and economics as a policy-oriented science. This book summarizes what economists do and do not know about the inflation and recession that affected the U.S. economy during the years of the Great Stagflation in the mid-1970s. The topics discussed include the basic concepts of stagflation, turbulent economic history of 1971-1976, anatomy of the great recession and inflation, and legacy of the Great Stagflation. The relation of wage-price controls, fiscal policy, and monetary policy to the Great Stagflation is also elaborated. This publication is beneficial to economists and students researching on the history of the Great Stagflation and policy errors of the 1970s.

The inside story, told with “insight, perspective, and stellar reporting,” of how an unassuming civil servant created trillions of dollars from thin air, combatted a public health crisis, and saved the American economy from a second Great Depression (Alan S. Blinder, former Vice Chair of the Federal Reserve). By February 2020, the U.S. economic expansion had become the longest on record. Unemployment was plumbing half-century lows. Stock markets soared to new highs. One month later, the public health battle against a deadly virus had pushed the economy into the equivalent of a medically induced coma. America’s workplaces—offices, shops, malls, and factories—shuttered. Many of the nation’s largest employers and tens of thousands of small businesses faced ruin. Over 22 million American jobs were lost. The extreme uncertainty led to some of the largest daily drops ever in the stock market. Nick Timiraos, the Wall Street Journal’s chief economics correspondent, draws on extensive interviews to detail the tense meetings, late night phone calls, and crucial video conferences behind the largest, swiftest U.S. economic policy response since World War II. Trillion Dollar Triage goes inside the Federal Reserve, one of the country’s most important and least understood institutions, to chronicle how its plainspoken chairman, Jay Powell, unleashed an unprecedented monetary barrage to keep the economy on life support. With the bleeding stemmed, the Fed faced a new challenge: How to nurture a recovery without unleashing an inflation-fueling, bubble-blowing money bomb? Trillion Dollar Triage is the definitive, gripping history of a creative and unprecedented battle to shield the American economy from the twin threats of a public health disaster and economic crisis. Economic theory and policy will never be the same.