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What Does Sectoral Inflation Tell Us About the Aggregate Trend in Inflation?

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Abstract

To know the appropriate stance of monetary policy, policymakers need to determine the overall trend in inflation. This is challenging in the face of varied and evolving patterns in inflation across sectors. We describe a multisector statistical model that provides a systematic approach to appropriately weight incoming inflation data from each sector. By flexibly applying time-varying weights to different sectors, this model adjusts to changing patterns in these sectors over time — including during the pandemic — and suggests that trend inflation is lower than might be suggested by the aggregate data, with an estimate of 2.35 percent for the third quarter of 2023.

Suggested Citation

  • Paul Ho & Mark Watson, 2023. "What Does Sectoral Inflation Tell Us About the Aggregate Trend in Inflation?," Richmond Fed Economic Brief, Federal Reserve Bank of Richmond, vol. 23(37), November.
    • Handle: RePEc:fip:fedreb:97311
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    File URL: https://www.richmondfed.org/publications/research/economic_brief/2023/eb_23-37
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