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The historical and recent behavior of goods and services inflation

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  • Richard Peach
  • Robert Rich
  • Alexis Antoniades

Abstract

Since the late 1990s, the combination of relatively high services inflation and declining goods prices has produced a record-level gap in these inflation rates. Some commentators argue that if the gap between services and goods inflation continues to expand in this manner, the outcome will be either faster overall inflation or deflation. This article examines the relationship between these divergent inflation rates from 1967 to 2002. The authors find that while the level of each inflation rate is subject to permanent shifts, the gap between services inflation and goods inflation over time remains stable. Moreover, when the gap is above its long-run value, as it currently is, equilibrium is restored through a rise in goods inflation and a slowing of services inflation. Their results suggest that concerns over an imminent marked acceleration or dramatic slowing in inflation may be unwarranted.

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Bibliographic Info

Article provided by Federal Reserve Bank of New York in its journal Economic Policy Review.

Volume (Year): (2004)
Issue (Month): Dec ()
Pages: 19-31

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Handle: RePEc:fip:fednep:y:2004:i:dec:p:19-31:n:v.10no.3

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Keywords: Inflation (Finance) ; Service industries;

References

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  1. Johansen, Soren & Juselius, Katarina, 1990. "Maximum Likelihood Estimation and Inference on Cointegration--With Applications to the Demand for Money," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 52(2), pages 169-210, May.
  2. Freeman, Donald G., 1998. "Do core inflation measures help forecast inflation?," Economics Letters, Elsevier, vol. 58(2), pages 143-147, February.
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Cited by:
  1. Aron, Janine & Muellbauer, John, 2012. "Improving forecasting in an emerging economy, South Africa: Changing trends, long run restrictions and disaggregation," International Journal of Forecasting, Elsevier, vol. 28(2), pages 456-476.
  2. Janine Aron & John Muellbauer, 2013. "New Methods for Forecasting Inflation, Applied to the US," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 75(5), pages 637-661, October.
  3. Janine Aron & John Muellbauer, 2008. "New methods for forecasting inflation and its sub-components: application to the USA," Economics Series Working Papers 406, University of Oxford, Department of Economics.
  4. Esteve, Vicente & Gil-Pareja, Salvador & Martinez-Serrano, Jose Antonio & Llorca-Vivero, Rafael, 2006. "Threshold cointegration and nonlinear adjustment between goods and services inflation in the United States," Economic Modelling, Elsevier, vol. 23(6), pages 1033-1039, December.
  5. Aron, Janine & Muellbauer, John, 2010. "Does aggregating forecasts by CPI component improve inflation forecast accuracy in South Africa?," CEPR Discussion Papers 7895, C.E.P.R. Discussion Papers.

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