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Research Spotlight: Tracking Inflation with Relative Price Changes

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  • Vinh Phan

Abstract

The Federal Reserve has operated under an inflation-targeting framework since the mid-1990s (at first implicitly and then explicitly) with successful results in maintaining price stability. Yet even when inflation is generally stable around its target rate, it still fluctuates from month to month. One source of those fluctuations is large shocks to supply and demand for particular goods or services. For example, a disruption in the oil market can cause a spike in gasoline prices and lift the overall inflation rate, even if prices in most other categories remain stable. Conversely, a shock that causes a sharp decline in gas prices can pull inflation down, even if other prices are unchanged. In both scenarios, the overall inflation rate moves significantly because of a single category that experiences a large relative price change. Can studying the relationship between inflation and the distribution of relative price changes provide insights into the stability of overall inflation?

Suggested Citation

  • Vinh Phan, 2025. "Research Spotlight: Tracking Inflation with Relative Price Changes," Econ Focus, Federal Reserve Bank of Richmond, vol. 25(3Q), May.
    • Handle: RePEc:fip:fedrrf:100055
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    File URL: https://www.richmondfed.org/publications/research/econ_focus/2025/q3_research_spotlight
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    Keywords

    inflation;

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