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Measuring transitory inflation: Implications for monetary policy and stock market volatility

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  • Bonaparte, Yosef
  • Fabozzi, Frank J.
  • Peron, Matt

Abstract

We present a methodology for developing a transitory inflation (TI) measure that captures persistent deviations from mean inflation, distinguishing it from underlying inflation. First, we analyze the decay rate of TI as it reverts to stationary inflation, finding that convergence typically ranges between two to four years. We then examine the impact of TI on monetary policy, demonstrating that a surge in TI increases monetary policy uncertainty and is followed by interest rate hikes by the Federal Reserve. Furthermore, we investigate how TI influences key stock market outcomes and find its impact varies across sectors and by market capitalization; overall, higher TI is associated with lower asset prices, especially for small-cap stocks, and higher stock market volatility. We also identify rising oil prices as a significant driver of TI.

Suggested Citation

  • Bonaparte, Yosef & Fabozzi, Frank J. & Peron, Matt, 2025. "Measuring transitory inflation: Implications for monetary policy and stock market volatility," Journal of International Money and Finance, Elsevier, vol. 153(C).
    • Handle: RePEc:eee:jimfin:v:153:y:2025:i:c:s0261560625000191
    DOI: 10.1016/j.jimonfin.2025.103284
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    More about this item

    Keywords

    Transitory Inflation; Stock Market Performance; Monetary Policy Uncertainty; Economic policy uncertainty; Oil prices;
    All these keywords.

    JEL classification:

    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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