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Common and Idiosyncratic Inflation

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Abstract

We disentangle price changes due to economy-wide shocks from those driven by idiosyncratic shocks by estimating a two-regime dynamic factor model with dynamic loadings on a new large dataset of finely disaggregated monthly personal consumption expenditures price inflation indexes for 1959-2023. We find that up to the mid-1990s and after the Covid pandemic, common shocks were the primary driver of US inflation dynamics and had long-lasting effects. In between, idiosyncratic shocks were the main driver, and common shocks had short-lived effects.

Suggested Citation

  • Hie Joo Ahn & Matteo Luciani, 2024. "Common and Idiosyncratic Inflation," Finance and Economics Discussion Series 2020-024r1, Board of Governors of the Federal Reserve System (U.S.).
    • Handle: RePEc:fip:fedgfe:100036
    DOI: 10.17016/FEDS.2020.024r1
    Note: Revision
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    File URL: https://www.federalreserve.gov/econres/feds/files/2020024r1pap.pdf
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    Keywords

    Core inflation; Dynamic factor model; Disaggregated consumer prices; Monetary policy;
    All these keywords.

    JEL classification:

    • 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
    • C43 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: Special Topics - - - Index Numbers and Aggregation
    • C55 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Large Data Sets: Modeling and Analysis
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E37 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Forecasting and Simulation: Models and Applications

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