## 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](https://www.imf.org/en/publications/wp/issues/2022/05/13/inflation-dynamics-in-advanced-economies-a-decomposition-into-cyclical-and-non-cyclical-517863)

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## Bibliographic details
- Authors: Weicheng Lian, Andreas Freitag
- Published: May 13, 2022
- Series: IMF Working Papers

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### Summary
- 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.

### Major findings and implications
- 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 areas and keywords
- 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

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## Content in this bundle

- **Working Paper**
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_Source: https://www.imf.org/en/publications/wp/issues/2022/05/13/inflation-dynamics-in-advanced-economies-a-decomposition-into-cyclical-and-non-cyclical-517863_