Inflation Dynamics in Advanced Economies: A Decomposition into Cyclical and Non-Cyclical Factors

IMF Working Papers, May 13, 2022

Source details

Canonical URL: Inflation Dynamics in Advanced Economies: A Decomposition into Cyclical and Non-Cyclical Factors

Inflation and unemployment rate were largely disconnected between 2000 and 2019 in advanced economies.
We decompose core inflation into two parts based on the cyclical sensitivity of CPI components and document several salient facts:
- (i) both the cyclical and non-cyclical parts had surges across advaced economies in 2011, when unemployment rates had limited changes;
- (ii) the non-cyclical part had a downward trend between 2012 and 2019, which existed across countries, sectors, goods, and services;
- (iii) global indexes such as oil price, shipping costs, and a global supply chain pressure index do not explain the downward trend; and
- (iv) the cyclical part, after controlling for the impact of economic slack, also had a downward trend between 2012 and 2019.
These patterns help disentangle competing explanations for the disconnect between inflation and unemployment rate.
The approach has potential to help understand forces shaping price pressures during the pandemic and in the post-pandemic period ahead.

Disconnection observed: inflation and unemployment rate largely disconnected in advanced economies over 2000–2019.
Dual decomposition: core inflation separated into cyclical and non-cyclical components using cyclical sensitivity of CPI components.
2011 surge: both components surged across advaced economies in 2011 despite limited changes in unemployment rates.
Missing explanations: common global indexes (oil price, shipping costs, global supply chain pressure index) do not account for the downward trend of the non-cyclical component from 2012 to 2019.
Cyclical subdued: after controlling for economic slack, the cyclical component also trended downward between 2012 and 2019.
Usefulness: the decomposition helps distinguish competing explanations for the Phillips-curve disconnect and can inform analysis of pandemic and post-pandemic price dynamics.

Subject: Consumer price indexes, Financial crises, Global financial crisis of 2008-2009, Inflation, Labor, Oil prices, Prices, Unemployment rate
Keywords: Consumer price indexes, core cyclical inflation, Global, Global financial crisis of 2008-2009, Inflation, Inflation dynamics, inflation expectation, inflation surge, Missing Disinflation, Missing Reflation, Oil prices, Phillips curve, pressure index, shipping cost, Slack, Unemployment rate