Inflation Factors

Danilo Leiva-Leon, Slavik Sheremirov, Jenny Tang and Zakrajšek, Egon

No 20574, CEPR Discussion Papers from Centre for Economic Policy Research

Abstract: This paper develops an econometric framework for identifying latent factors that provide real-time estimates of supply and demand conditions shaping goods- and services-related price pressures in the U.S. economy. The factors are estimated using category-specific personal consumption expenditures (PCE) data on prices and quantities, using a sign-restricted dynamic factor model that imposes theoretical predictions of the effects of fluctuations in supply and demand on prices and associated quantities through factor loadings. The resulting estimates are used to decompose total PCE inflation into contributions from common factors -- goods demand, goods supply, services demand, services supply, and inflation expectations -- and category-specific idiosyncratic components. Validation exercises demonstrate that the estimated factors provide an informative and coherent narrative of inflation dynamics over time and can be effectively used for forecasting and policy analysis.

Keywords: Inflation; Services; Supply; Demand; Expectations; Dynamic factor models; Sign restrictions (search for similar items in EconPapers)
JEL-codes: C11 C32 E31 (search for similar items in EconPapers)
Date: 2025-08
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