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Is there an inflation puzzle?

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  • Cara S. Lown
  • Robert W. Rich

Abstract

This paper investigates the issue of an "inflation puzzle", or the lack of an acceleration in inflation during the current expansion. Our findings indicate that while inflation has appeared to be unusually low, we can account for this feature of the data over most of the current expansion. In particular, the results support the view that the weak increase in compensation growth during the period 1992-94 was a major contributor to the low level of inflation observed through late 1995. ; More recently, however, there is evidence of an anomaly in the behavior of inflation. The out-of-sample forecasts from our price-inflation Phillips curve have been subject to over-predication errors for the last seven quarters. In addition, the forecasts from our estimated wage-inflation Phillips curve have closely tracked the movements in compensation growth over the last two years. These findings suggest that the appearance of an inflation puzzle can not be fully explained by either reduced growth in benefit costs or unusually slow wage growth.

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Bibliographic Info

Paper provided by Federal Reserve Bank of New York in its series Research Paper with number 9723.

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Date of creation: 1997
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Handle: RePEc:fip:fednrp:9723

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Keywords: Inflation (Finance) ; Wages ; Cafeteria benefit plans;

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  1. Olivier J. Blanchard, 1984. "The Lucas Critique and the Volcker Deflation," NBER Working Papers 1326, National Bureau of Economic Research, Inc.
  2. Hamilton, James D., 1996. "This is what happened to the oil price-macroeconomy relationship," Journal of Monetary Economics, Elsevier, vol. 38(2), pages 215-220, October.
  3. Hooker, Mark A., 1996. "What happened to the oil price-macroeconomy relationship?," Journal of Monetary Economics, Elsevier, vol. 38(2), pages 195-213, October.
  4. Cara S. Lown & Robert W. Rich, 1997. "Is there an inflation puzzle?," Economic Policy Review, Federal Reserve Bank of New York, issue Dec, pages 51-77.
  5. Mork, Knut Anton, 1989. "Oil and Macroeconomy When Prices Go Up and Down: An Extension of Hamilton's Results," Journal of Political Economy, University of Chicago Press, vol. 97(3), pages 740-44, June.
  6. Robert J. Gordon, 1970. "The Recent Acceleration of Inflation and Its Lessons for the Future," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 1(1), pages 8-47.
  7. Robert G. King & James H. Stock & Mark W. Watson, 1995. "Temporal instability of the unemployment-inflation relationship," Economic Perspectives, Federal Reserve Bank of Chicago, issue May, pages 2-12.
  8. Jeffrey C. Fuhrer, 1995. "The Phillips curve is alive and well," New England Economic Review, Federal Reserve Bank of Boston, issue Mar, pages 41-56.
  9. King, Robert G. & Watson, Mark W., 1994. "The post-war U.S. phillips curve: a revisionist econometric history," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 41(1), pages 157-219, December.
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