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Post-COVID Inflation Dynamics: Higher for Longer

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  • Randal J. Verbrugge
  • Saeed Zaman

Abstract

We implement a novel nonlinear structural model featuring an empirically-successful frequency-dependent and asymmetric Phillips curve; unemployment frequency components interact with three components of core PCE – core goods, housing, and core services ex-housing – and a variable capturing supply shocks. Forecast tests verify model’s accuracy in its unemployment-inflation tradeoffs, crucial for monetary policy. Using this model, we assess the plausibility of the December 2022 Summary of Economic Projections (SEP). By 2025Q4, the SEP projects 2.1 percent inflation; however, conditional on the SEP unemployment path, we project inflation of 2.9 percent. A fairly deep recession delivers the SEP inflation path, but a simple welfare analysis rejects this outcome.

Suggested Citation

  • Randal J. Verbrugge & Saeed Zaman, 2023. "Post-COVID Inflation Dynamics: Higher for Longer," Working Papers 23-06R, Federal Reserve Bank of Cleveland, revised 20 Jun 2023.
    • Handle: RePEc:fip:fedcwq:95478
    DOI: 10.26509/frbc-wp-202306r
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    References listed on IDEAS

    as
    1. Todd E. Clark & Saeed Zaman, 2013. "Forecasting implications of the recent decline in inflation," Economic Commentary, Federal Reserve Bank of Cleveland, issue Nov.
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    More about this item

    Keywords

    Nonlinear Phillips Curve; Frequency Decomposition; Supply Price Pressures; Structural VAR; Nonlinear Impulse Response Functions; Welfare Analysis;
    All these keywords.

    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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