Understanding U.S. Inflation During the COVID Era

IMF Working Papers, October 28, 2022

Source details

The paper decomposes the dramatic rise in U.S. inflation since 2020 into:
- A rise in core inflation as measured by the weighted median inflation rate.
- Deviations of headline inflation from core.

Core inflation rise is explained with two primary factors:
- Tightening of the labor market captured by the ratio of job vacancies to unemployment.
- Pass-through into core from past shocks to headline inflation.

Headline shocks are explained largely by:
- Increases in energy prices.
- Supply chain problems captured by backlogs of orders for goods and services.

The paper simulates the future path of inflation for alternative paths of the unemployment rate, with a focus on the projections of Federal Reserve policymakers in which unemployment rises only modestly to 4.4 percent.
Key scenario findings:
- The unemployment path rising to 4.4 percent returns inflation to near the Fed’s target only under optimistic assumptions about both:
- Inflation expectations.
- The Beveridge curve relating the unemployment and vacancy rates.
- Under less benign assumptions about these factors, inflation remains well above target unless unemployment rises by more than the Fed projects.