Post-COVID Inflation Dynamics: Higher for Longer

Randal Verbrugge and Saeed Zaman

No 23-06R, Working Papers from Federal Reserve Bank of Cleveland

Abstract: We implement a novel nonlinear structural model featuring an empirically-successful frequency-dependent and asymmetric Phillips curve; unemployment frequency components interact with three components of core PCE – core goods, housing, and core services ex-housing – and a variable capturing supply shocks. Forecast tests verify model’s accuracy in its unemployment-inflation tradeoffs, crucial for monetary policy. Using this model, we assess the plausibility of the December 2022 Summary of Economic Projections (SEP). By 2025Q4, the SEP projects 2.1 percent inflation; however, conditional on the SEP unemployment path, we project inflation of 2.9 percent. A fairly deep recession delivers the SEP inflation path, but a simple welfare analysis rejects this outcome.

Keywords: Nonlinear Phillips Curve; Frequency Decomposition; Supply Price Pressures; Structural VAR; Nonlinear Impulse Response Functions; Welfare Analysis (search for similar items in EconPapers)
JEL-codes: C32 E31 E32 E52 (search for similar items in EconPapers)
Pages: 46
Date: 2023-01-13, Revised 2023-06-20
New Economics Papers: this item is included in nep-ban and nep-mon
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Citations: View citations in EconPapers (1)

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Journal Article: Post‐COVID inflation dynamics: Higher for longer (2024)
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DOI: 10.26509/frbc-wp-202306r

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