Question

summary on article "decomposing inflation" by Andrew Bauer, Nicholas Haltom and William Peterman

Answer 1

As U.S. core inflation measures have declined in recent years, analysts have renewed their efforts to understand inflation dynamics. A common approach to this issue is to get key conclusions about how price changes of major components affect the aggregate inflation rate.

The authors calculate the contributions to inflation for individual series of the consumer price index (CPI) and personal consumption expenditures price index (PCEPI) and then aggregate those contributions into major consumer expenditure categories. This method provides quite good information about the underlying trends in inflation, enabling them to make more informed inferences about the near-term direction of inflation. Beneficially it allows analysts to distinguish broad-based changes in inflation from changes due to relative price movements of a few components. ; The analysis focuses on the core components of the consumer price index (CPI) and the personal consumption expenditures price Index (PCEPI) . In addition, they examine the decline in CPI core inflation over the 2002–03 period and find that the decline was largely driven by relative price changes of two components.

Over the long term, the authors note, the composition of core services inflation has remained relatively stable while the composition of core goods inflation has changed dramatically. Over the 2002–03 period, movements in core inflation measures resulted mainly from significant relative price changes of two components that were persistent enough to alter the path of core inflation for a sustained period, the authors conclude. ; The results of this study highlight the importance of gauging the impact of relative changes in a low-inflation environment and suggest that recent concern about overall price deflation was perhaps overstated.