Post‐COVID inflation dynamics: Higher for longer

Randal Verbrugge and Saeed Zaman

Journal of Forecasting, 2024, vol. 43, issue 4, 871-893

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 personal consumption expenditures (PCE)—core goods, housing, and core services ex‐housing—and a variable capturing supply shocks. Forecast tests verify accuracy in its unemployment–inflation trade‐offs, 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% inflation; however, conditional on the SEP unemployment path, we project 2.9%. A fairly deep recession delivers the SEP inflation path, but a simple welfare analysis rejects this outcome.

Date: 2024
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https://doi.org/10.1002/for.3070

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Working Paper: Post-COVID Inflation Dynamics: Higher for Longer (2023)
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Persistent link: https://EconPapers.repec.org/RePEc:wly:jforec:v:43:y:2024:i:4:p:871-893

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