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Understanding Trend Inflation Through the Lens of the Goods and Services Sectors

Author

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  • Yunjong Eo
  • Luis Uzeda
  • Benjamin Wong

Abstract

We distinguish between the goods and services sectors in an otherwise standard unobserved components model of U.S. inflation. Our main finding is that, while both sectors used to contribute to the overall variation in aggregate trend inflation, since the 1990s this variation has been predominantly driven by the services sector. We pinpoint two key changes in sector-specific inflation dynamics which led to our main finding: (i) a large fall in the volatility of trend goods inflation; and (ii) the disappearance of comovement between trend goods and trend services inflation. Our results are robust to inflation developments associated with the recent Covid-19 pandemic.

Suggested Citation

  • Yunjong Eo & Luis Uzeda & Benjamin Wong, 2022. "Understanding Trend Inflation Through the Lens of the Goods and Services Sectors," CAMA Working Papers 2022-28, Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University.
    • Handle: RePEc:een:camaaa:2022-28
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    Cited by:

    1. Hie Joo Ahn & Matteo Luciani, 2021. "Relative prices and pure inflation since the mid-1990s," Finance and Economics Discussion Series 2021-069, Board of Governors of the Federal Reserve System (U.S.).
    2. Ascari, Guido & Fosso, Luca, 2024. "The international dimension of trend inflation," Journal of International Economics, Elsevier, vol. 148(C).
    3. Guido Ascari & Luca Fosso, 2021. "The Inflation Rate Disconnect Puzzle: On the International Component of Trend Inflation and the Flattening of the Phillips Curve," Discussion Papers 2113, Centre for Macroeconomics (CFM).
    4. Jackson, Ilya & Ivanov, Dmitry, 2023. "A beautiful shock? Exploring the impact of pandemic shocks on the accuracy of AI forecasting in the beauty care industry," Transportation Research Part E: Logistics and Transportation Review, Elsevier, vol. 180(C).
    5. Oleksiy Kryvtsov & James (Jim) C. MacGee & Luis Uzeda, 2023. "The 2021–22 Surge in Inflation," Discussion Papers 2023-3, Bank of Canada.
    6. Bowen Fu & Chenghan Hou & Jan Pruser, 2025. "Assessing the Effects of Monetary Shocks on Macroeconomic Stars: A SMUC-IV Framework," Papers 2510.05802, arXiv.org, revised Dec 2025.
    7. Rychalovska, Yuliya & Slobodyan, Sergey & Wouters, Raf, 2025. "Survey expectations, learning and inflation dynamics," European Economic Review, Elsevier, vol. 180(C).
    8. Li, Mengheng & Mendieta-Munoz, Ivan, 2025. "Unpacking trend inflation: Evidence from a factor correlated unobserved components model of sticky and flexible prices," EconStor Preprints 320299, ZBW - Leibniz Information Centre for Economics.
    9. Philippe Goulet Coulombe & Karin Klieber & Christophe Barrette & Maximilian Goebel, 2024. "Maximally Forward-Looking Core Inflation," Papers 2404.05209, arXiv.org.
    10. Juan Angel Garcia & Aubrey Poon, 2022. "Inflation trends in Asia: implications for central banks [Are Phillips curves useful for forecasting inflation?]," Oxford Economic Papers, Oxford University Press, vol. 74(3), pages 671-700.
    11. Horn, Aidan J. & Martin, Lisa & Pretorius, Jan H. & Steenkamp, Daan, 2025. "Gaps in the South African Inflation Targeting Debate," MPRA Paper 124010, University Library of Munich, Germany.
    12. Luis Uzeda, 2025. "Pulse check: Measuring underlying inflation and its drivers," Staff Analytical Notes 2025-29, Bank of Canada.
    13. Claudio Borio & Piti Disyatat & Dora Xia & Egon Zakrajšek, 2021. "Monetary policy, relative prices and inflation control: flexibility born out of success," BIS Quarterly Review, Bank for International Settlements, September.
    14. Jongrim Ha & M. Ayhan Kose & Franziska Ohnsorge, 2022. "Global Stagflation," CAMA Working Papers 2022-41, Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University.
    15. Bingyang Wang & Grant Johnson & Maria Hybinette & Tucker Balch, 2025. "Is All the Information in the Price? LLM Embeddings versus the EMH in Stock Clustering," Papers 2509.01590, arXiv.org.
    16. Aydin Yakut, Dilan, 2025. "Beyond Aggregates: A Dual Lens on Eurozone Trend Inflation," Research Technical Papers 3/RT/25, Central Bank of Ireland.

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    Keywords

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    JEL classification:

    • C11 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Bayesian Analysis: General
    • 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
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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