Inflation and the Phillips Curve · Phillips curve is so flat Method: Estimating Phillips curve...

of 30 /30
Congressional Budget Office 66 th Annual Economic Outlook Conference Research Seminar in Quantitative Economics, University of Michigan November 15, 2018 Yiqun Gloria Chen Macroeconomic Analysis Division Inflation and the Phillips Curve As developmental work for analysis for the Congress, the information in this presentation is preliminary and is being circulated to stimulate discussion and critical comment.

Embed Size (px)

Transcript of Inflation and the Phillips Curve · Phillips curve is so flat Method: Estimating Phillips curve...

Page 1: Inflation and the Phillips Curve · Phillips curve is so flat Method: Estimating Phillips curve equations at the component level – Measure of slack: The unemployment gap (CBO’s

Congressional Budget Office

66th Annual Economic Outlook ConferenceResearch Seminar in Quantitative Economics University of Michigan

November 15 2018

Yiqun Gloria ChenMacroeconomic Analysis Division

Inflation and the Phillips Curve

As developmental work for analysis for the Congress the information in this presentation is preliminary and is being circulated to stimulate discussion and critical comment

1

CBO

Inflation 1948ndash2018

2

CBO

Inflation Expectations 1948ndash2018

3

CBO

Unemployment 1948ndash2018

4

CBO

This flow chart shows the structure of CBOrsquos inflation model for the PCEPI as well as the spending shares for its components Those components include PCNFOOD Food amp Beverage Purchases for Off-Premises Consumption PCNENERGY Gasoline amp Other Energy Goods PCSENERGY Electricity and Gas PCDELEC Video Audio Photo amp Info Processing Equipment amp Media PCDMVAP Motor Vehicles amp Parts PCDMED Therapeutic Appliances amp Equipment PCDOTH Other Durable Goods (CBOrsquos calculation) PCNMED Pharmaceutical amp Other Medical Products PCNOTH Other Nondurable Goods (CBOrsquos calculation) PCSHOUS Housing PCSMED Health Care Services and PCSOTH Other Services (CBOrsquos calculation)

Structure of CBOrsquos Model for the Personal Consumption Expenditures (PCE) Price Index

5

CBO

120587120587119905119905= 119864119864119905119905120587120587119905119905+1 minus 120631120631 119880119880119905119905 minus 119880119880lowast + 120574120574119885119885119905119905 + 120598120598119905119905

Determinants of inflationndash 119864119864119905119905120587120587119905119905+1 Inflation expectationsndash 120573120573 119880119880119905119905 minus 119880119880lowast Unemployment gap or other measures of slack in the economyndash 120574120574119885119885119905119905 Supply-side shocks (for example relative price of imports energy etc)

Issue 1 Cyclical sensitivity of inflationndash For the price index of personal consumption expenditures (PCEPI) excluding food

and energy (ldquoXFErdquo or ldquocore-XFErdquo) 120573120573 has declined from 03~04 in the 1970s to 005~01 in the most recent decades

ndash Does inflation still respond to slack

Issue 2 The form of inflation expectationsndash ldquoAccelerationistrdquo 119864119864119905119905120587120587119905119905+1= 119860119860 119871119871 120587120587119905119905minus1 (distributed lags of inflation)ndash ldquoAnchoredrdquo 119864119864119905119905120587120587119905119905+1= 120587120587lowast (constant)ndash Combined 119864119864119905119905120587120587119905119905+1=120630120630119860119860(119871119871)120587120587119905119905minus1 + (120783120783 minus 120630120630)120587120587lowast

Expectation-Augmented Phillips Curve

6

CBO

Cyclical Sensitivity of InflationGoods Versus Services

7

CBO

Goal Understanding why the aggregate Phillips curve is so flat

Method Estimating Phillips curve equations at the component levelndash Measure of slack The unemployment gap (CBOrsquos estimate)ndash Sample 1998Q1ndash2018Q3 (stable inflation expectations)ndash Control for Relative price of imports and energy goods outliers (for example ldquocash

for clunkersrdquo)ndash Similar to Stock and Watson (2018) Struyven (2017)

Main Finding Divergence between goods and services in terms of cyclical sensitivity

ndash Services Remained largely pro-cyclicalmdashfor example shelterndash Goods Not pro-cyclical in the past two decades

Dampening the slope of the aggregate Phillips curve Exception Food prices

Phillips Curve Model at the Component Level

8

CBO

Shelter Inflation

9

CBO

Auto Inflation

10

CBO

Services Largely Pro-Cyclical

Unemployment Gap

Lagged Inflation Constant Adjusted R2

PCE Services Less Energy -014 032 191 046(000) (001) (035)

PCE Housing Services -023 058 129 080(000) (000) (024)

CPI-U Owners Equivalent of Rent -021 062 113 078(000) (000) (024)

CPI-U Rent of Primary Residence -015 067 116 084(000) (000) (026)

PCE Health Care Services -006 062 092 042(038) (000) (026)

PCE Services Less Energy Rent of Shelter amp Health care -004 035 172 038(050) (000) (028)

CPI-U Services Less Energy Services amp Rent of Shelter -015 040 188 034(001) (000) (040)

CPI-U Medical Care Services -005 070 115 034(051) (000) (045)

CPI-U Food away from Home -009 062 105 057(005) (000) (025)

CPI-U Education Services -007 093 030 081(016) (000) (029)

CPI-U Transportation Services -002 -011 320 016(087) (027) (036)

CPIU MicroPC - Gd

CPIU MicroPC - Sv

CPIU Components

CPIU MicroPC

Disaggregated PC Model

CPI and PCE weights

Dist of Price Changes (PCE)

lt02017Q12017Q22017Q32017Q42982879399018251530076497118373328794231576306846275112741969116890-22017Q12017Q22017Q32017Q4211846689120427351723027711342023221545531071181461218771897151376142-32017Q12017Q22017Q32017Q413958943933910467193842670834840815394970956904032747859413992923283-52017Q12017Q22017Q32017Q4176887169228583721572899097997604717537133523823844221799519998565525-102017Q12017Q22017Q32017Q482906102250864162821465544005778097459146483527973784429446756549655gt102017Q12017Q22017Q32017Q490482660159195003936531226468855499268986388255841612510045272509943

Percent of Expenditures

11

CBO

Goods Largely Not Pro-Cyclical Except Food

Unemployment Gap

Lagged Inflation Constant Adjusted R2

PCE Durable Goods 008 028 -154 027(031) (001) (024)

PCE Motor Vehicles and Parts 031 030 -021 043(005) (000) (025)

PCE Video Audio Photo amp 016 060 -395 044 Information Processing Equipment amp Media (034) (000) (087)

PCE Other Durable Goods (including Medical Equipments) -010 038 -050 027(028) (000) (019)

PCE Nondurable Goods Less Energy -014 073 039 044(005) (000) (017)

PCE Food amp Beverage Purchased for Off-Premises Consumpt -024 066 071 055(004) (000) (024)

CPI-U Food at Home -027 063 082 052(005) (000) (028)

CPI-U Alcoholic Beverages -017 034 147 016(004) (000) (026)

PCE Pharmaceutical amp Other Medical Products -002 033 202 020(088) (000) (039)

PCE Other Nondurable Goods 008 025 000 042(046) (001) (018)

CPI-U Apparel 054 014 -069 022(000) (018) (030)

CPIU MicroPC - Gd

CPIU MicroPC - Sv

CPIU Components

CPIU MicroPC

Disaggregated PC Model

CPI and PCE weights

Dist of Price Changes (PCE)

lt02017Q12017Q22017Q32017Q42982879399018251530076497118373328794231576306846275112741969116890-22017Q12017Q22017Q32017Q4211846689120427351723027711342023221545531071181461218771897151376142-32017Q12017Q22017Q32017Q413958943933910467193842670834840815394970956904032747859413992923283-52017Q12017Q22017Q32017Q4176887169228583721572899097997604717537133523823844221799519998565525-102017Q12017Q22017Q32017Q482906102250864162821465544005778097459146483527973784429446756549655gt102017Q12017Q22017Q32017Q490482660159195003936531226468855499268986388255841612510045272509943

Percent of Expenditures

12

CBO

Servicesndash Prices are largely determined by domestic andor local factors

Household maintenance restaurants etcndash Cannot be inventoried

Goodsndash Lots of measurement issues and noise from one-off price shocks (Stock and

Watson 2018) Measurement issue very severe for apparel recreational goods financial

services etc One-off price shocks ldquocash for clunkersrdquo (2009) federal tobacco tax hike

(2009) ndash Tend to be more heavily influenced by long-run structural forces

Globalization Abdih et al (2016) and others ldquoThe Amazon effectrdquo Goolsbee and Klenow (2018) Increasing industrial concentration

Goods Versus Services Possible Explanations

13

CBO

Services Componentsndash Generally Phillips curve equations at the component level work relatively wellndash Special case PCE health care services (policy plays a large role)

CBOrsquos model incorporates CBOrsquos projection of Medicare reimbursement rate growth

Goods Componentsndash ldquoTop-down Approachrdquo CBO currently uses core PCE inflation (from the

aggregate Phillips curve) as an input in the equations for goods components Keep track of movements in relative prices Judgment in sector-specific trends Control for relative price of imports one-off price shocks etc

Forecasting Inflation at the Component Level

14

CBO

Modeling Inflation ExpectationsBackward-Looking Versus Anchored

15

CBO

Reduced-form

120587120587119905119905= 120630120630119860119860(119871119871)120587120587119905119905minus1 + (120783120783 minus 120630120630)120587120587lowast minus 120573120573 119880119880119905119905 minus 119880119880119905119905lowast + 120574120574119885119885119905119905 + 120598120598119905119905o 119860119860(119871119871)120587120587119905119905minus1 Use four lags of past inflationo 120587120587lowast Long-run inflationldquoanchorrdquoo 119880119880119905119905 minus 119880119880119905119905lowast The unemployment gap (CBOrsquos estimate)o 119885119885119905119905 Supply-side shocks including relative prices of imports and energy goodso Sample 1998Q1ndash2018Q3

Blanchard (2016) ldquoThe Phillips Curve Back to the rsquo60srdquo ndash Shows 120630120630 declined over time and is currently very small for headline CPI

But component-level analysis implies that the measure of inflation matters

This exercise Try ten different measures of aggregate inflation

Estimating the Aggregate Phillips Curve

16

CBO

Three measures of headline inflationndash Headline CPI-U (BLS) and Headline PCEPI (BEA) ndash Chained CPI-U (BLS)

Ten Measures of Inflation

17

CBO

Seven measures of core inflationndash Approach 1 Remove the most volatile price changes

XFE CPI-U (BLS) and XFE PCEPI (BEA) Median CPI-U and 16-Trimmed-Mean CPI-U (Federal Reserve Bank of

Cleveland) Rank price changes by size each month and trim the items with price

changes that are above or below a certain threshold ldquoMedianrdquo is just extreme trimming

Trimmed-Mean PCEPI (Federal Reserve Bank of Dallas) Trimming point chosen optimally every month

ndash Approach 2 Remove the most frequent price changes Sticky CPI-U and Sticky-XFE CPI (Federal Reserve Bank of Atlanta)

Price changes every 43 months or longer (Bils and Klenow 2004)

Ten Measures of Inflation (Continued)

18

CBO

Seven Measures of Core Inflation

19

CBO

Relative weight of lagged inflation and constantldquoanchorrdquondash Overall inflation 120572120572 asymp 02 consistent with Blanchard (2016) for headline CPI

Estimation Results I

This figure plots the sum of the estimated coefficients on lagged inflation terms using recursive samples that start in 1998Q1 and end in 2012Q1 2012Q2 hellip and 2018Q1 The Phillips curve equations are ldquounrestrictedrdquo as no assumption was imposed on the value of π before the estimation Instead the intercept of the equation which in theory equals απ was estimated and then the values of α and π were calculated by assuming the long-run restriction on the estimated coefficients

20

CBO

Relative weight of lagged inflation and constantldquoanchorrdquondash Overall inflation 120572120572 asymp 02 consistent with Blanchard (2016) for headline CPIndash Core inflation 120572120572 asymp 05 particularly for non-XFE measures

Estimation Results I (Continued)

This figure plots the sum of the estimated coefficients on lagged inflation terms using recursive samples that start in 1998Q1 and end in 2012Q1 2012Q2 hellip and 2018Q1 The Phillips curve equations are ldquounrestrictedrdquo as no assumption was imposed on the value of π before the estimation Instead the intercept of the equation which in theory equals απ was estimated and then the values of α and π were calculated by assuming the long-run restriction on the estimated coefficients

21

CBO

Further analysis using survey measures of inflation expectations suggests

Inflation expectations by consumers matter more for inflation dynamics than the expectations by professional forecasters for all ten measures of inflation

ndash Consumersrsquo expectations more closely resemble those of firms (Coibion and Gorodnichenko 2015)

ndash Transmission of professional forecastersrsquo views to consumers is weak in a low-inflation environment

ndash Coibion et al (2017) Similar finding for headline CPI

Long-run inflation expectations by consumers are ldquoshock-anchoredrdquo but not ldquolevel-anchoredrdquo (Ball and Mazumder 2011)

ndash Shock-anchoring Transitory shocks not passed to expectationsndash Level-anchoring Expectations tied to a particular level

Estimation Results I (Continued)

22

CBO

Comparing measures of core inflationndash The Phillips curve fits the non-XFE measures very well

Average adj 1198771198772 of non-XFE measures = 07 Ball and Mazumder (2014) Showed this for median CPI

ndash XFEs are ldquooutliersrdquo particularly XFE CPI-U (low 120572120572 and low 1198771198772) Average adj 1198771198772 of XFE measures = 025

Possible explanationndash Fewer goods prices in the non-XFE core measures

Goods price changes are more volatile Goods price changes occur more frequently

Estimation Results II

23

CBO

CPI Components Summary Statistics and Categorization

Mean Standard Deviation

Relative Importance

(2017)

Change in Relative

Importantce 2007-2017

XFE Sticky CPIProbability

(= Median CPI) (1998-2007)

(1) (2) (3) (4) (5) (6) (7)

Core (XFE) ServicesOwners Equivalent of Rent (OER) 27 11 232 298 Y Y 52Rent of Primary Residence 32 11 79 101 Y Y 5Medical Care Services 38 13 67 233 Y Y 2Education Services 49 15 30 058 Y Y 0Transportation Services 27 18 60 -105 Y Y 5

Core (XFE) GoodsApparel -03 25 31 -189 Y N 2New Vehicles 01 23 36 -142 Y N 3Used Cars and Trucks -03 8 21 020 Y N 0Medical Care Goods 29 16 18 059 Y Y 1

Food and EnergyFood away from Home 28 09 59 019 N Y 11Food at Home 21 27 77 -201 N N 6Energy 36 202 75 078 N N 1

CategorizationSummary Statistics

Major CPI Components

The categorization of components into sticky CPI is based on Bryan and Meyer (2010) ldquoAre Some Prices in the CPI More Forward Looking Than Others We Think Sordquo Economic Commentary Federal Reserve Bank of Cleveland httpswwwfrbatlantaorg-mediadocumentsresearchinflationprojectstickypricesticky-price-cpi-supplemental-readingpdf The probabilities of a componentrsquos being the median CPI are based on the ldquorevised methodologyrdquo that split the OER into four regional components For more detail see httpswwwclevelandfedorgenour-researchindicators-and-datamedian-cpirevised-methodologyaspx

CPIU MicroPC - Gd

CPIU MicroPC - Sv

CPIU Components

CPIU MicroPC

Disaggregated PC Model

CPI and PCE weights

Dist of Price Changes (PCE)

lt02017Q12017Q22017Q32017Q42982879399018251530076497118373328794231576306846275112741969116890-22017Q12017Q22017Q32017Q4211846689120427351723027711342023221545531071181461218771897151376142-32017Q12017Q22017Q32017Q413958943933910467193842670834840815394970956904032747859413992923283-52017Q12017Q22017Q32017Q4176887169228583721572899097997604717537133523823844221799519998565525-102017Q12017Q22017Q32017Q482906102250864162821465544005778097459146483527973784429446756549655gt102017Q12017Q22017Q32017Q490482660159195003936531226468855499268986388255841612510045272509943

Percent of Expenditures

24

CBO

The slope of the Phillips curve Flat but steeper for CPIs than PCEPIsndash 120573120573 = 005∿01 for PCEPIs but = 01∿02 for CPIsndash Why Shelter the most cyclically sensitive component has a much larger weight in CPI than in PCEPI

Estimation Results III

This figure plots the sum of the estimated coefficients on lagged inflation terms using recursive samples that start in 1998Q1 and end in 2012Q1 2012Q2 hellip and 2018Q1 The Phillips curve equations are ldquounrestrictedrdquo as no assumption was imposed on the value of π before the estimation Instead the intercept of the equation which in theory equals απ was estimated and then the values of α and π were calculated by assuming the long-run restriction on the estimated coefficients

25

CBO

The slope of the Phillips curve Flat but steeper for CPIs than PCEPIsndash 120573120573 = 005∿01 for PCEPIs but = 01∿02 for CPIsndash Why Shelter the most cyclically sensitive component has a much larger weight in CPI than in PCEPI

Estimation Results III (Continued)

This figure plots the sum of the estimated coefficients on lagged inflation terms using recursive samples that start in 1998Q1 and end in 2012Q1 2012Q2 hellip and 2018Q1 The Phillips curve equations are ldquounrestrictedrdquo as no assumption was imposed on the value of π before the estimation Instead an intercept of the equation which in theory equals απ was estimated and then the value of α and π were calculated by assuming the long-run restriction on the estimated coefficients

26

CBO

Reviewing the Findings

27

CBO

Phillips-curve analysis at the component level provides insight intondash Cyclical sensitivity of aggregate inflation

For most service components and food inflation process is pro-cyclical For most non-food good components inflation process is not pro-cyclical

Need better understanding and models for goods price inflationndash Difference in the behaviors of various inflation measures

CPI is more cyclically sensitive than PCEPI because shelter has larger share in CPI

Non-XFE measures of core inflation better capture movements in trend inflation because they contain fewer noisy goods components

The aggregate Phillips curve has shifted away from ldquoaccelerationistrdquo toward an ldquoanchoredrdquo form but the process appears incomplete

ndash Need better understanding of the formation process of inflation expectations particularly those of consumers and firms

Conclusions

28

CBO

Abdih Yasser Ravi Balakrishnan and Baoping Shang ldquoWhat Is Keeping US Core Inflation Low Insights From a Bottom-Up Approachrdquo International Monetary Fund 2016

Ball Laurence and Sandeep Mazumder ldquoInflation Dynamics and the Great Recessionrdquo Brookings Papers on Economic Activity (2011) 337ndash406

Blanchard Olivier ldquoThe Phillips Curve Back to the rsquo60s American Economic Review 1065 (2016) 31ndash34

Bils Mark and Peter J Klenow ldquoSome Evidence on the Importance of Sticky Pricesrdquo Journal of Political Economy 1125 (2004) 947ndash985

Coibion Olivier and Yuriy Gorodnichenko ldquoIs the Phillips Curve Alive and Well After All Inflation Expectations and the Missing Disinflationrdquo American Economic Journal Macroeconomics 71 (2015) 197ndash232

References

29

CBO

Coibion Olivier Yuriy Gorodnichenko and Rupal Kamdar ldquoThe Formation of Expectations Inflation and the Phillips Curverdquo No w23304 National Bureau of Economic Research 2017

Goolsbee Austan D and Peter J Klenow ldquoInternet Rising Prices Falling Measuring Inflation in a World of E-Commercerdquo AEA Papers and Proceedings Vol 108 2018

Stock J and Mark Watson ldquoSlack and Cyclically Sensitive Inflationrdquo ECB Forum on Central Banking Sintra Portugal 2018

Struyven Dann ldquoWhich Prices Still Respond to Slackrdquo Goldman Sachs Economics Research (October 31 2017)

References (Continued)

  • Inflation and the Phillips Curve
  • Inflation 1948ndash2018
  • Inflation Expectations 1948ndash2018
  • Unemployment 1948ndash2018
  • Structure of CBOrsquos Model for the Personal Consumption Expenditures (PCE) Price Index
  • Expectation-Augmented Phillips Curve
  • Slide Number 7
  • Phillips Curve Model at the Component Level
  • Shelter Inflation
  • Auto Inflation
  • Services Largely Pro-Cyclical
  • Goods Largely Not Pro-Cyclical Except Food
  • Goods Versus Services Possible Explanations
  • Forecasting Inflation at the Component Level
  • Slide Number 15
  • Estimating the Aggregate Phillips Curve
  • Ten Measures of Inflation
  • Ten Measures of Inflation (Continued)
  • Seven Measures of Core Inflation
  • Estimation Results I
  • Estimation Results I (Continued)
  • Estimation Results I (Continued)
  • Estimation Results II
  • CPI Components Summary Statistics and Categorization
  • Estimation Results III
  • Estimation Results III (Continued)
  • Slide Number 27
  • Conclusions
  • References
  • References (Continued)
Current vintage data
Dec-16 Jan-17 Feb-17 Mar-17 Apr-17 May-17 Jun-17 Jul-17 Aug-17 Sep-17 Oct-17 Nov-17 Dec-17
Rose at 0-2 rate 314 179 190 266 178 158 181 206 275 165 181 224 251
Rose at 2-3 rate 82 137 111 171 191 280 111 130 116 216 88 97 39
Rose at 3-5 rate 240 198 253 80 126 136 209 161 241 125 231 258 177
Rose at 5-10 rate 100 122 57 70 71 85 91 60 51 114 50 122 81
Rose faster than 10 rate 67 137 108 27 151 55 75 116 65 97 159 82 134
227 281 387 282 286 334 328 253 283 291 218 317
212 172 215455310712 218771897151
140 194 153949709569 74785941399
177 157 175371335238 221799519999
83 82 74591464835 84429446757
90 94 92689863883 125100452725
298 301 287942315763 275112741969
2017Q1 2017Q2 2017Q3 2017Q4
Fell 2983 3008 2879 2751
Rose at 0-2 rate 2118 1723 2155 2188
Rose at 2-3 rate 1396 1938 1539 748
Rose at 3-5 rate 1769 1573 1754 2218
Rose at 5-10 rate 829 821 746 844
Rose faster than 10 rate 905 937 927 1251
Major Sectors CPI PCEPI
Housing 426 183
Health Care 85 231
Food and Beverages 146 137
Transportation 153 90
Recreation 57 89
Education and Communication 70 46
Apparel 30 29
Financial Services 02 47
Other 30 147
Total 100 100
Data December 2016
Naiumlve Phillips-Curve-Style Models (Sample 1998-2017)
8 9 10 11
Variables Constant Lagged Inflation Unemployment Gap Adjusted R2 Order of AR Order of Lagged Rucgap
Owners Equivalent of Rent 118 062 -022 078 1 1
(48) (79) -(40)
Rent of Primary Residence 141 060 -018 084 1 4
(48) (74) -(33)
Medical Care Services 131 067 -007 032 2
(27) (58) -(09)
Education Services 023 095 -009 078 4 2
(07) (149) -(16)
Transportation Services 26 01 -00 018 1 3
(59) (05) -(02)
Apparel -060 027 043 016 4 0
-(19) (15) (23)
New Vehicles -046 003 065 018 1 0
-(17) (03) (39)
Used Cars and Trucks -001 031 092 028 2 4
-(00) (35) (19)
Medical Care Goods 23 02 -01 023 3
(51) (14) -(08)
Food away from Home 116 060 -008 050 1 2
(40) (62) -(15)
Food at Home 105 063 -009 059 1
(37) (86) -(07)
Energy 983 -022 -061 048 1
(48) -(22) -(06)
Unemployment Gap Lagged Inflation Constant Adjusted R2 Obs Durbin-Watson Statistic Order of Lagged Inflation Order of Lagged Unemployment Gap
Services
Owners Equivalent of Rent -021 062 113 078 83 171 1 1
000 000 024
Rent of Primary Residence -015 067 116 084 83 217 1 5
000 000 026
Food away from Home -008 061 108 057 83 251 2 2
007 000 025
Medical Care Services -005 070 115 034 83 201 2 0
051 000 045
Education Services -007 093 030 081 83 202 4 2
016 000 029
Transportation Services -002 -011 320 016 83 198 2 3
087 027 036
Goods
Apparel 050 010 -054 008 83 192 4 0
001 039 032
New Vehicles 038 002 -034 034 83 186 1 0
001 084 023
Used Cars and Trucks 038 018 -019 034 83 174 2 4
047 013 082
Food at Home -005 065 103 057 83 237 1 0
072 000 027
Medical Care Goods -005 046 169 056 83 196 3 0
053 000 028
Controlling Inflnm + Inflne
Unemployment Gap Lagged Inflation Constant Adjusted R2 Observations Durbin-Watson Statistic Order of Lagged Inflation Order of Lagged Unemployment Gap
Owners Equivalent of Rent (OER) -0212 0633 1120 077 80 179 1 1
(0058) (0082) (0260)
Rent of Primary Residence -0171 0604 1395 084 80 201 1 5
(0056) (0085) (0308)
Medical Care Services -0070 0693 1191 031 80 205 2 0
(0083) (0123) (0514)
Education Services -0087 0947 0296 078 80 204 4 2
(0055) (0067) (0354)
Transportation Services -0035 0154 2284 019 80 203 2 3
(0130) (0160) (0485)
Apparel 0416 0305 -0594 015 80 187 4 0
(0187) (0178) (0327)
New Vehicles 0655 0021 -0494 017 80 200 1 0
(0169) (0112) (0287)
Used Cars and Trucks 0410 0215 -0860 038 80 185 2 4
(0535) (0114) (0902)
Medical Care Goods -0082 0202 2251 022 80 192 3 0
(0105) (0141) (0458)
Food away from Home -0086 0613 1159 059 80 236 2 2
(0132) (0074) (0302)
Food at Home -0065 0751 0781 053 80 216 1 0
(0049) (0116) (0340)
Energy -0735 0068 2120 096 80 134 2 0
(0311) (0035) (0651)
Controlling Inflnm
Unemployment Gap Lagged Inflation Constant Adjusted R2 Observations Durbin-Watson Statistic Order of Lagged Inflation Order of Lagged Unemployment Gap
Core (XFE) Services
Owners Equivalent of Rent (OER) -0212 0632 1129 078 80 180 1 1
(0058) (0081) (0257)
Rent of Primary Residence -0171 0605 1393 084 80 201 1 5
(0055) (0084) (0302)
Medical Care Services -0068 0696 1189 032 80 205 2 0
(0082) (0122) (0511)
Education Services -0087 0943 0287 078 80 201 4 2
(0055) (0067) (0353)
Transportation Services -0030 0076 2602 017 80 202 2 3
(0131) (0152) (0440)
Apparel 0426 0292 -0544 016 80 189 4 0
(0186) (0176) (0315)
New Vehicles 0658 0023 -0436 017 80 196 1 0
(0168) (0112) (0272)
Used Cars and Trucks 0399 0190 -0322 036 80 171 2 4
(0543) (0115) (0861)
Medical Care Goods -0080 0203 2289 022 80 193 3 0
(0104) (0140) (0453)
Food away from Home -0090 0628 1038 059 80 237 2 2
(0132) (0073) (0282)
Food at Home -0064 0754 0741 053 80 216 1 0
(0049) (0116) (0338)
Energy -0678 -0305 10270 049 80 198 2 0
(1085) (0114) (2053)
Major CPI Components Summary Statistics Categorization
Mean Standard Deviation Relative Importance (2017) Change in Relative Importantce 2007-2017 XFE Sticky CPI Probability (= Median CPI) (1998-2007)
1 2 3 4 5 6 7
Core (XFE) Services
Owners Equivalent of Rent (OER) 27 11 232 298 Y Y 52
Rent of Primary Residence 32 11 79 101 Y Y 5
Medical Care Services 38 13 67 233 Y Y 2
Education Services 49 15 30 058 Y Y 0
Transportation Services 27 18 60 -105 Y Y 5
Core (XFE) Goods
Apparel -03 25 31 -189 Y N 2
New Vehicles 01 23 36 -142 Y N 3
Used Cars and Trucks -03 8 21 020 Y N 0
Medical Care Goods 29 16 18 059 Y Y 1
Food and Energy
Food away from Home 28 09 59 019 N Y 11
Food at Home 21 27 77 -201 N N 6
Energy 36 202 75 078 N N 1
Unemployment Gap Lagged Inflation Constant Adjusted R2 Observations Durbin-Watson Statistic
PCE Services Less Energy -014 032 191 046 83 185
(000) (001) (035)
PCE Housing Services -023 058 129 080 83 208
(000) (000) (024)
CPI-U Owners Equivalent of Rent -021 062 113 078 83 171
(000) (000) (024)
CPI-U Rent of Primary Residence -015 067 116 084 83 217
(000) (000) (026)
PCE Health Care Services -006 062 092 042 83 207
(038) (000) (026)
PCE Services Less Energy Rent of Shelter amp Health care -004 035 172 038 83 226
(050) (000) (028)
CPI-U Services Less Energy Services amp Rent of Shelter -015 040 188 034 83 218
(001) (000) (040)
CPI-U Medical Care Services -005 070 115 034 83 201
(051) (000) (045)
CPI-U Food away from Home -009 062 105 057 83 264
(005) (000) (025)
CPI-U Education Services -007 093 030 081 83 202
(016) (000) (029)
CPI-U Transportation Services -002 -011 320 016 83 198
(087) (027) (036)
Unemployment Gap Lagged Inflation Constant Adjusted R2 Observations Durbin-Watson Statistic
PCE Durable Goods 008 028 -154 027 83 183
(031) (001) (024)
PCE Motor Vehicles and Parts 031 030 -021 043 83 178
(005) (000) (025)
PCE Video Audio Photo amp 016 060 -395 044 83 222
Information Processing Equipment amp Media (034) (000) (087)
PCE Other Durable Goods (including Medical Equipments) -010 038 -050 027 83 188
(028) (000) (019)
PCE Nondurable Goods Less Energy -014 073 039 044 83 203
(005) (000) (017)
PCE Food amp Beverage Purchased for Off-Premises Consumption -024 066 071 055 83 226
(004) (000) (024)
CPI-U Food at Home -027 063 082 052 83 216
(005) (000) (028)
CPI-U Alcoholic Beverages -017 034 147 016 83 209
(004) (000) (026)
PCE Pharmaceutical amp Other Medical Products -002 033 202 020 83 173
(088) (000) (039)
PCE Other Nondurable Goods 008 025 000 042 83 179
(046) (001) (018)
CPI-U Apparel 054 014 -069 022 83 191
(000) (018) (030)
Current vintage data
Dec-16 Jan-17 Feb-17 Mar-17 Apr-17 May-17 Jun-17 Jul-17 Aug-17 Sep-17 Oct-17 Nov-17 Dec-17
Rose at 0-2 rate 314 179 190 266 178 158 181 206 275 165 181 224 251
Rose at 2-3 rate 82 137 111 171 191 280 111 130 116 216 88 97 39
Rose at 3-5 rate 240 198 253 80 126 136 209 161 241 125 231 258 177
Rose at 5-10 rate 100 122 57 70 71 85 91 60 51 114 50 122 81
Rose faster than 10 rate 67 137 108 27 151 55 75 116 65 97 159 82 134
227 281 387 282 286 334 328 253 283 291 218 317
212 172 215455310712 218771897151
140 194 153949709569 74785941399
177 157 175371335238 221799519999
83 82 74591464835 84429446757
90 94 92689863883 125100452725
298 301 287942315763 275112741969
2017Q1 2017Q2 2017Q3 2017Q4
Fell 2983 3008 2879 2751
Rose at 0-2 rate 2118 1723 2155 2188
Rose at 2-3 rate 1396 1938 1539 748
Rose at 3-5 rate 1769 1573 1754 2218
Rose at 5-10 rate 829 821 746 844
Rose faster than 10 rate 905 937 927 1251
Major Sectors CPI PCEPI
Housing 426 183
Health Care 85 231
Food and Beverages 146 137
Transportation 153 90
Recreation 57 89
Education and Communication 70 46
Apparel 30 29
Financial Services 02 47
Other 30 147
Total 100 100
Data December 2016
Naiumlve Phillips-Curve-Style Models (Sample 1998-2017)
8 9 10 11
Variables Constant Lagged Inflation Unemployment Gap Adjusted R2 Order of AR Order of Lagged Rucgap
Owners Equivalent of Rent 118 062 -022 078 1 1
(48) (79) -(40)
Rent of Primary Residence 141 060 -018 084 1 4
(48) (74) -(33)
Medical Care Services 131 067 -007 032 2
(27) (58) -(09)
Education Services 023 095 -009 078 4 2
(07) (149) -(16)
Transportation Services 26 01 -00 018 1 3
(59) (05) -(02)
Apparel -060 027 043 016 4 0
-(19) (15) (23)
New Vehicles -046 003 065 018 1 0
-(17) (03) (39)
Used Cars and Trucks -001 031 092 028 2 4
-(00) (35) (19)
Medical Care Goods 23 02 -01 023 3
(51) (14) -(08)
Food away from Home 116 060 -008 050 1 2
(40) (62) -(15)
Food at Home 105 063 -009 059 1
(37) (86) -(07)
Energy 983 -022 -061 048 1
(48) -(22) -(06)
Unemployment Gap Lagged Inflation Constant Adjusted R2 Obs Durbin-Watson Statistic Order of Lagged Inflation Order of Lagged Unemployment Gap
Services
Owners Equivalent of Rent -021 062 113 078 83 171 1 1
000 000 024
Rent of Primary Residence -015 067 116 084 83 217 1 5
000 000 026
Food away from Home -008 061 108 057 83 251 2 2
007 000 025
Medical Care Services -005 070 115 034 83 201 2 0
051 000 045
Education Services -007 093 030 081 83 202 4 2
016 000 029
Transportation Services -002 -011 320 016 83 198 2 3
087 027 036
Goods
Apparel 050 010 -054 008 83 192 4 0
001 039 032
New Vehicles 038 002 -034 034 83 186 1 0
001 084 023
Used Cars and Trucks 038 018 -019 034 83 174 2 4
047 013 082
Food at Home -005 065 103 057 83 237 1 0
072 000 027
Medical Care Goods -005 046 169 056 83 196 3 0
053 000 028
Controlling Inflnm + Inflne
Unemployment Gap Lagged Inflation Constant Adjusted R2 Observations Durbin-Watson Statistic Order of Lagged Inflation Order of Lagged Unemployment Gap
Owners Equivalent of Rent (OER) -0212 0633 1120 077 80 179 1 1
(0058) (0082) (0260)
Rent of Primary Residence -0171 0604 1395 084 80 201 1 5
(0056) (0085) (0308)
Medical Care Services -0070 0693 1191 031 80 205 2 0
(0083) (0123) (0514)
Education Services -0087 0947 0296 078 80 204 4 2
(0055) (0067) (0354)
Transportation Services -0035 0154 2284 019 80 203 2 3
(0130) (0160) (0485)
Apparel 0416 0305 -0594 015 80 187 4 0
(0187) (0178) (0327)
New Vehicles 0655 0021 -0494 017 80 200 1 0
(0169) (0112) (0287)
Used Cars and Trucks 0410 0215 -0860 038 80 185 2 4
(0535) (0114) (0902)
Medical Care Goods -0082 0202 2251 022 80 192 3 0
(0105) (0141) (0458)
Food away from Home -0086 0613 1159 059 80 236 2 2
(0132) (0074) (0302)
Food at Home -0065 0751 0781 053 80 216 1 0
(0049) (0116) (0340)
Energy -0735 0068 2120 096 80 134 2 0
(0311) (0035) (0651)
Controlling Inflnm
Unemployment Gap Lagged Inflation Constant Adjusted R2 Observations Durbin-Watson Statistic Order of Lagged Inflation Order of Lagged Unemployment Gap
Core (XFE) Services
Owners Equivalent of Rent (OER) -0212 0632 1129 078 80 180 1 1
(0058) (0081) (0257)
Rent of Primary Residence -0171 0605 1393 084 80 201 1 5
(0055) (0084) (0302)
Medical Care Services -0068 0696 1189 032 80 205 2 0
(0082) (0122) (0511)
Education Services -0087 0943 0287 078 80 201 4 2
(0055) (0067) (0353)
Transportation Services -0030 0076 2602 017 80 202 2 3
(0131) (0152) (0440)
Apparel 0426 0292 -0544 016 80 189 4 0
(0186) (0176) (0315)
New Vehicles 0658 0023 -0436 017 80 196 1 0
(0168) (0112) (0272)
Used Cars and Trucks 0399 0190 -0322 036 80 171 2 4
(0543) (0115) (0861)
Medical Care Goods -0080 0203 2289 022 80 193 3 0
(0104) (0140) (0453)
Food away from Home -0090 0628 1038 059 80 237 2 2
(0132) (0073) (0282)
Food at Home -0064 0754 0741 053 80 216 1 0
(0049) (0116) (0338)
Energy -0678 -0305 10270 049 80 198 2 0
(1085) (0114) (2053)
Major CPI Components Summary Statistics Categorization
Mean Standard Deviation Relative Importance (2017Q4) Change in Relative Importantce CPI Excluding Food and Energy Sticky CPI Probability (= Median CPI) (1998-2007)
1 2 3 4 5 6 7
Core (XFE) Services
Owners Equivalent of Rent (OER) 27 11 232 298 Y Y 52
Rent of Primary Residence 32 11 79 101 Y Y 5
Medical Care Services 38 13 67 233 Y Y 2
Education Services 49 15 30 058 Y Y 0
Transportation Services 27 18 60 -105 Y Y 5
Core (XFE) Goods
Apparel -03 25 31 -189 Y N 2
New Vehicles 01 23 36 -142 Y N 3
Used Cars and Trucks -03 8 21 020 Y N 0
Medical Care Goods 29 16 18 059 Y Y 1
Food and Energy
Food away from Home 28 09 59 019 N Y 11
Food at Home 21 27 77 -201 N N 6
Energy 36 202 75 078 N N 1
Unemployment Gap Lagged Inflation Constant Adjusted R2 Observations Durbin-Watson Statistic
PCE Services Less Energy -014 032 191 046 83 185
(000) (001) (035)
PCE Housing Services -023 058 129 080 83 208
(000) (000) (024)
CPI-U Owners Equivalent of Rent -021 062 113 078 83 171
(000) (000) (024)
CPI-U Rent of Primary Residence -015 067 116 084 83 217
(000) (000) (026)
PCE Health Care Services -006 062 092 042 83 207
(038) (000) (026)
PCE Services Less Energy Rent of Shelter amp Health care -004 035 172 038 83 226
(050) (000) (028)
CPI-U Services Less Energy Services amp Rent of Shelter -015 040 188 034 83 218
(001) (000) (040)
CPI-U Medical Care Services -005 070 115 034 83 201
(051) (000) (045)
CPI-U Food away from Home -009 062 105 057 83 264
(005) (000) (025)
CPI-U Education Services -007 093 030 081 83 202
(016) (000) (029)
CPI-U Transportation Services -002 -011 320 016 83 198
(087) (027) (036)
Unemployment Gap Lagged Inflation Constant Adjusted R2 Observations Durbin-Watson Statistic
PCE Durable Goods 008 028 -154 027 83 183
(031) (001) (024)
PCE Motor Vehicles and Parts 031 030 -021 043 83 178
(005) (000) (025)
PCE Video Audio Photo amp 016 060 -395 044 83 222
Information Processing Equipment amp Media (034) (000) (087)
PCE Other Durable Goods (including Medical Equipments) -010 038 -050 027 83 188
(028) (000) (019)
PCE Nondurable Goods Less Energy -014 073 039 044 83 203
(005) (000) (017)
PCE Food amp Beverage Purchased for Off-Premises Consumption -024 066 071 055 83 226
(004) (000) (024)
CPI-U Food at Home -027 063 082 052 83 216
(005) (000) (028)
CPI-U Alcoholic Beverages -017 034 147 016 83 209
(004) (000) (026)
PCE Pharmaceutical amp Other Medical Products -002 033 202 020 83 173
(088) (000) (039)
PCE Other Nondurable Goods 008 025 000 042 83 179
(046) (001) (018)
CPI-U Apparel 054 014 -069 022 83 191
(000) (018) (030)
Current vintage data
Dec-16 Jan-17 Feb-17 Mar-17 Apr-17 May-17 Jun-17 Jul-17 Aug-17 Sep-17 Oct-17 Nov-17 Dec-17
Rose at 0-2 rate 314 179 190 266 178 158 181 206 275 165 181 224 251
Rose at 2-3 rate 82 137 111 171 191 280 111 130 116 216 88 97 39
Rose at 3-5 rate 240 198 253 80 126 136 209 161 241 125 231 258 177
Rose at 5-10 rate 100 122 57 70 71 85 91 60 51 114 50 122 81
Rose faster than 10 rate 67 137 108 27 151 55 75 116 65 97 159 82 134
227 281 387 282 286 334 328 253 283 291 218 317
212 172 215455310712 218771897151
140 194 153949709569 74785941399
177 157 175371335238 221799519999
83 82 74591464835 84429446757
90 94 92689863883 125100452725
298 301 287942315763 275112741969
2017Q1 2017Q2 2017Q3 2017Q4
Fell 2983 3008 2879 2751
Rose at 0-2 rate 2118 1723 2155 2188
Rose at 2-3 rate 1396 1938 1539 748
Rose at 3-5 rate 1769 1573 1754 2218
Rose at 5-10 rate 829 821 746 844
Rose faster than 10 rate 905 937 927 1251
Major Sectors CPI PCEPI
Housing 426 183
Health Care 85 231
Food and Beverages 146 137
Transportation 153 90
Recreation 57 89
Education and Communication 70 46
Apparel 30 29
Financial Services 02 47
Other 30 147
Total 100 100
Data December 2016
Naiumlve Phillips-Curve-Style Models (Sample 1998-2017)
8 9 10 11
Variables Constant Lagged Inflation Unemployment Gap Adjusted R2 Order of AR Order of Lagged Rucgap
Owners Equivalent of Rent 118 062 -022 078 1 1
(48) (79) -(40)
Rent of Primary Residence 141 060 -018 084 1 4
(48) (74) -(33)
Medical Care Services 131 067 -007 032 2
(27) (58) -(09)
Education Services 023 095 -009 078 4 2
(07) (149) -(16)
Transportation Services 26 01 -00 018 1 3
(59) (05) -(02)
Apparel -060 027 043 016 4 0
-(19) (15) (23)
New Vehicles -046 003 065 018 1 0
-(17) (03) (39)
Used Cars and Trucks -001 031 092 028 2 4
-(00) (35) (19)
Medical Care Goods 23 02 -01 023 3
(51) (14) -(08)
Food away from Home 116 060 -008 050 1 2
(40) (62) -(15)
Food at Home 105 063 -009 059 1
(37) (86) -(07)
Energy 983 -022 -061 048 1
(48) -(22) -(06)
Unemployment Gap Lagged Inflation Constant Adjusted R2 Obs Durbin-Watson Statistic Order of Lagged Inflation Order of Lagged Unemployment Gap
Services
Owners Equivalent of Rent -021 062 113 078 83 171 1 1
000 000 024
Rent of Primary Residence -015 067 116 084 83 217 1 5
000 000 026
Food away from Home -008 061 108 057 83 251 2 2
007 000 025
Medical Care Services -005 070 115 034 83 201 2 0
051 000 045
Education Services -007 093 030 081 83 202 4 2
016 000 029
Transportation Services -002 -011 320 016 83 198 2 3
087 027 036
Goods
Apparel 050 010 -054 008 83 192 4 0
001 039 032
New Vehicles 038 002 -034 034 83 186 1 0
001 084 023
Used Cars and Trucks 038 018 -019 034 83 174 2 4
047 013 082
Food at Home -005 065 103 057 83 237 1 0
072 000 027
Medical Care Goods -005 046 169 056 83 196 3 0
053 000 028
Controlling Inflnm + Inflne
Unemployment Gap Lagged Inflation Constant Adjusted R2 Observations Durbin-Watson Statistic Order of Lagged Inflation Order of Lagged Unemployment Gap
Owners Equivalent of Rent (OER) -0212 0633 1120 077 80 179 1 1
(0058) (0082) (0260)
Rent of Primary Residence -0171 0604 1395 084 80 201 1 5
(0056) (0085) (0308)
Medical Care Services -0070 0693 1191 031 80 205 2 0
(0083) (0123) (0514)
Education Services -0087 0947 0296 078 80 204 4 2
(0055) (0067) (0354)
Transportation Services -0035 0154 2284 019 80 203 2 3
(0130) (0160) (0485)
Apparel 0416 0305 -0594 015 80 187 4 0
(0187) (0178) (0327)
New Vehicles 0655 0021 -0494 017 80 200 1 0
(0169) (0112) (0287)
Used Cars and Trucks 0410 0215 -0860 038 80 185 2 4
(0535) (0114) (0902)
Medical Care Goods -0082 0202 2251 022 80 192 3 0
(0105) (0141) (0458)
Food away from Home -0086 0613 1159 059 80 236 2 2
(0132) (0074) (0302)
Food at Home -0065 0751 0781 053 80 216 1 0
(0049) (0116) (0340)
Energy -0735 0068 2120 096 80 134 2 0
(0311) (0035) (0651)
Controlling Inflnm
Unemployment Gap Lagged Inflation Constant Adjusted R2 Observations Durbin-Watson Statistic Order of Lagged Inflation Order of Lagged Unemployment Gap
Core (XFE) Services
Owners Equivalent of Rent (OER) -0212 0632 1129 078 80 180 1 1
(0058) (0081) (0257)
Rent of Primary Residence -0171 0605 1393 084 80 201 1 5
(0055) (0084) (0302)
Medical Care Services -0068 0696 1189 032 80 205 2 0
(0082) (0122) (0511)
Education Services -0087 0943 0287 078 80 201 4 2
(0055) (0067) (0353)
Transportation Services -0030 0076 2602 017 80 202 2 3
(0131) (0152) (0440)
Apparel 0426 0292 -0544 016 80 189 4 0
(0186) (0176) (0315)
New Vehicles 0658 0023 -0436 017 80 196 1 0
(0168) (0112) (0272)
Used Cars and Trucks 0399 0190 -0322 036 80 171 2 4
(0543) (0115) (0861)
Medical Care Goods -0080 0203 2289 022 80 193 3 0
(0104) (0140) (0453)
Food away from Home -0090 0628 1038 059 80 237 2 2
(0132) (0073) (0282)
Food at Home -0064 0754 0741 053 80 216 1 0
(0049) (0116) (0338)
Energy -0678 -0305 10270 049 80 198 2 0
(1085) (0114) (2053)
Major CPI Components Summary Statistics Categorization
Mean Standard Deviation Relative Importance (2017Q4) Change in Relative Importantce CPI Excluding Food and Energy Sticky CPI Probability (= Median CPI) (1998-2007)
1 2 3 4 5 6 7
Core (XFE) Services
Owners Equivalent of Rent (OER) 27 11 232 298 Y Y 52
Rent of Primary Residence 32 11 79 101 Y Y 5
Medical Care Services 38 13 67 233 Y Y 2
Education Services 49 15 30 058 Y Y 0
Transportation Services 27 18 60 -105 Y Y 5
Core (XFE) Goods
Apparel -03 25 31 -189 Y N 2
New Vehicles 01 23 36 -142 Y N 3
Used Cars and Trucks -03 8 21 020 Y N 0
Medical Care Goods 29 16 18 059 Y Y 1
Food and Energy
Food away from Home 28 09 59 019 N Y 11
Food at Home 21 27 77 -201 N N 6
Energy 36 202 75 078 N N 1
Unemployment Gap Lagged Inflation Constant Adjusted R2 Observations Durbin-Watson Statistic
PCE Services Less Energy -014 032 191 046 83 185
(000) (001) (035)
PCE Housing Services -023 058 129 080 83 208
(000) (000) (024)
CPI-U Owners Equivalent of Rent -021 062 113 078 83 171
(000) (000) (024)
CPI-U Rent of Primary Residence -015 067 116 084 83 217
(000) (000) (026)
PCE Health Care Services -006 062 092 042 83 207
(038) (000) (026)
PCE Services Less Energy Rent of Shelter amp Health care -004 035 172 038 83 226
(050) (000) (028)
CPI-U Services Less Energy Services amp Rent of Shelter -015 040 188 034 83 218
(001) (000) (040)
CPI-U Medical Care Services -005 070 115 034 83 201
(051) (000) (045)
CPI-U Food away from Home -009 062 105 057 83 264
(005) (000) (025)
CPI-U Education Services -007 093 030 081 83 202
(016) (000) (029)
CPI-U Transportation Services -002 -011 320 016 83 198
(087) (027) (036)
Unemployment Gap Lagged Inflation Constant Adjusted R2 Observations Durbin-Watson Statistic
PCE Durable Goods 008 028 -154 027 83 183
(031) (001) (024)
PCE Motor Vehicles and Parts 031 030 -021 043 83 178
(005) (000) (025)
PCE Video Audio Photo amp 016 060 -395 044 83 222
Information Processing Equipment amp Media (034) (000) (087)
PCE Other Durable Goods (including Medical Equipments) -010 038 -050 027 83 188
(028) (000) (019)
PCE Nondurable Goods Less Energy -014 073 039 044 83 203
(005) (000) (017)
PCE Food amp Beverage Purchased for Off-Premises Consumption -024 066 071 055 83 226
(004) (000) (024)
CPI-U Food at Home -027 063 082 052 83 216
(005) (000) (028)
CPI-U Alcoholic Beverages -017 034 147 016 83 209
(004) (000) (026)
PCE Pharmaceutical amp Other Medical Products -002 033 202 020 83 173
(088) (000) (039)
PCE Other Nondurable Goods 008 025 000 042 83 179
(046) (001) (018)
CPI-U Apparel 054 014 -069 022 83 191
(000) (018) (030)
Page 2: Inflation and the Phillips Curve · Phillips curve is so flat Method: Estimating Phillips curve equations at the component level – Measure of slack: The unemployment gap (CBO’s

1

CBO

Inflation 1948ndash2018

2

CBO

Inflation Expectations 1948ndash2018

3

CBO

Unemployment 1948ndash2018

4

CBO

This flow chart shows the structure of CBOrsquos inflation model for the PCEPI as well as the spending shares for its components Those components include PCNFOOD Food amp Beverage Purchases for Off-Premises Consumption PCNENERGY Gasoline amp Other Energy Goods PCSENERGY Electricity and Gas PCDELEC Video Audio Photo amp Info Processing Equipment amp Media PCDMVAP Motor Vehicles amp Parts PCDMED Therapeutic Appliances amp Equipment PCDOTH Other Durable Goods (CBOrsquos calculation) PCNMED Pharmaceutical amp Other Medical Products PCNOTH Other Nondurable Goods (CBOrsquos calculation) PCSHOUS Housing PCSMED Health Care Services and PCSOTH Other Services (CBOrsquos calculation)

Structure of CBOrsquos Model for the Personal Consumption Expenditures (PCE) Price Index

5

CBO

120587120587119905119905= 119864119864119905119905120587120587119905119905+1 minus 120631120631 119880119880119905119905 minus 119880119880lowast + 120574120574119885119885119905119905 + 120598120598119905119905

Determinants of inflationndash 119864119864119905119905120587120587119905119905+1 Inflation expectationsndash 120573120573 119880119880119905119905 minus 119880119880lowast Unemployment gap or other measures of slack in the economyndash 120574120574119885119885119905119905 Supply-side shocks (for example relative price of imports energy etc)

Issue 1 Cyclical sensitivity of inflationndash For the price index of personal consumption expenditures (PCEPI) excluding food

and energy (ldquoXFErdquo or ldquocore-XFErdquo) 120573120573 has declined from 03~04 in the 1970s to 005~01 in the most recent decades

ndash Does inflation still respond to slack

Issue 2 The form of inflation expectationsndash ldquoAccelerationistrdquo 119864119864119905119905120587120587119905119905+1= 119860119860 119871119871 120587120587119905119905minus1 (distributed lags of inflation)ndash ldquoAnchoredrdquo 119864119864119905119905120587120587119905119905+1= 120587120587lowast (constant)ndash Combined 119864119864119905119905120587120587119905119905+1=120630120630119860119860(119871119871)120587120587119905119905minus1 + (120783120783 minus 120630120630)120587120587lowast

Expectation-Augmented Phillips Curve

6

CBO

Cyclical Sensitivity of InflationGoods Versus Services

7

CBO

Goal Understanding why the aggregate Phillips curve is so flat

Method Estimating Phillips curve equations at the component levelndash Measure of slack The unemployment gap (CBOrsquos estimate)ndash Sample 1998Q1ndash2018Q3 (stable inflation expectations)ndash Control for Relative price of imports and energy goods outliers (for example ldquocash

for clunkersrdquo)ndash Similar to Stock and Watson (2018) Struyven (2017)

Main Finding Divergence between goods and services in terms of cyclical sensitivity

ndash Services Remained largely pro-cyclicalmdashfor example shelterndash Goods Not pro-cyclical in the past two decades

Dampening the slope of the aggregate Phillips curve Exception Food prices

Phillips Curve Model at the Component Level

8

CBO

Shelter Inflation

9

CBO

Auto Inflation

10

CBO

Services Largely Pro-Cyclical

Unemployment Gap

Lagged Inflation Constant Adjusted R2

PCE Services Less Energy -014 032 191 046(000) (001) (035)

PCE Housing Services -023 058 129 080(000) (000) (024)

CPI-U Owners Equivalent of Rent -021 062 113 078(000) (000) (024)

CPI-U Rent of Primary Residence -015 067 116 084(000) (000) (026)

PCE Health Care Services -006 062 092 042(038) (000) (026)

PCE Services Less Energy Rent of Shelter amp Health care -004 035 172 038(050) (000) (028)

CPI-U Services Less Energy Services amp Rent of Shelter -015 040 188 034(001) (000) (040)

CPI-U Medical Care Services -005 070 115 034(051) (000) (045)

CPI-U Food away from Home -009 062 105 057(005) (000) (025)

CPI-U Education Services -007 093 030 081(016) (000) (029)

CPI-U Transportation Services -002 -011 320 016(087) (027) (036)

CPIU MicroPC - Gd

CPIU MicroPC - Sv

CPIU Components

CPIU MicroPC

Disaggregated PC Model

CPI and PCE weights

Dist of Price Changes (PCE)

lt02017Q12017Q22017Q32017Q42982879399018251530076497118373328794231576306846275112741969116890-22017Q12017Q22017Q32017Q4211846689120427351723027711342023221545531071181461218771897151376142-32017Q12017Q22017Q32017Q413958943933910467193842670834840815394970956904032747859413992923283-52017Q12017Q22017Q32017Q4176887169228583721572899097997604717537133523823844221799519998565525-102017Q12017Q22017Q32017Q482906102250864162821465544005778097459146483527973784429446756549655gt102017Q12017Q22017Q32017Q490482660159195003936531226468855499268986388255841612510045272509943

Percent of Expenditures

11

CBO

Goods Largely Not Pro-Cyclical Except Food

Unemployment Gap

Lagged Inflation Constant Adjusted R2

PCE Durable Goods 008 028 -154 027(031) (001) (024)

PCE Motor Vehicles and Parts 031 030 -021 043(005) (000) (025)

PCE Video Audio Photo amp 016 060 -395 044 Information Processing Equipment amp Media (034) (000) (087)

PCE Other Durable Goods (including Medical Equipments) -010 038 -050 027(028) (000) (019)

PCE Nondurable Goods Less Energy -014 073 039 044(005) (000) (017)

PCE Food amp Beverage Purchased for Off-Premises Consumpt -024 066 071 055(004) (000) (024)

CPI-U Food at Home -027 063 082 052(005) (000) (028)

CPI-U Alcoholic Beverages -017 034 147 016(004) (000) (026)

PCE Pharmaceutical amp Other Medical Products -002 033 202 020(088) (000) (039)

PCE Other Nondurable Goods 008 025 000 042(046) (001) (018)

CPI-U Apparel 054 014 -069 022(000) (018) (030)

CPIU MicroPC - Gd

CPIU MicroPC - Sv

CPIU Components

CPIU MicroPC

Disaggregated PC Model

CPI and PCE weights

Dist of Price Changes (PCE)

lt02017Q12017Q22017Q32017Q42982879399018251530076497118373328794231576306846275112741969116890-22017Q12017Q22017Q32017Q4211846689120427351723027711342023221545531071181461218771897151376142-32017Q12017Q22017Q32017Q413958943933910467193842670834840815394970956904032747859413992923283-52017Q12017Q22017Q32017Q4176887169228583721572899097997604717537133523823844221799519998565525-102017Q12017Q22017Q32017Q482906102250864162821465544005778097459146483527973784429446756549655gt102017Q12017Q22017Q32017Q490482660159195003936531226468855499268986388255841612510045272509943

Percent of Expenditures

12

CBO

Servicesndash Prices are largely determined by domestic andor local factors

Household maintenance restaurants etcndash Cannot be inventoried

Goodsndash Lots of measurement issues and noise from one-off price shocks (Stock and

Watson 2018) Measurement issue very severe for apparel recreational goods financial

services etc One-off price shocks ldquocash for clunkersrdquo (2009) federal tobacco tax hike

(2009) ndash Tend to be more heavily influenced by long-run structural forces

Globalization Abdih et al (2016) and others ldquoThe Amazon effectrdquo Goolsbee and Klenow (2018) Increasing industrial concentration

Goods Versus Services Possible Explanations

13

CBO

Services Componentsndash Generally Phillips curve equations at the component level work relatively wellndash Special case PCE health care services (policy plays a large role)

CBOrsquos model incorporates CBOrsquos projection of Medicare reimbursement rate growth

Goods Componentsndash ldquoTop-down Approachrdquo CBO currently uses core PCE inflation (from the

aggregate Phillips curve) as an input in the equations for goods components Keep track of movements in relative prices Judgment in sector-specific trends Control for relative price of imports one-off price shocks etc

Forecasting Inflation at the Component Level

14

CBO

Modeling Inflation ExpectationsBackward-Looking Versus Anchored

15

CBO

Reduced-form

120587120587119905119905= 120630120630119860119860(119871119871)120587120587119905119905minus1 + (120783120783 minus 120630120630)120587120587lowast minus 120573120573 119880119880119905119905 minus 119880119880119905119905lowast + 120574120574119885119885119905119905 + 120598120598119905119905o 119860119860(119871119871)120587120587119905119905minus1 Use four lags of past inflationo 120587120587lowast Long-run inflationldquoanchorrdquoo 119880119880119905119905 minus 119880119880119905119905lowast The unemployment gap (CBOrsquos estimate)o 119885119885119905119905 Supply-side shocks including relative prices of imports and energy goodso Sample 1998Q1ndash2018Q3

Blanchard (2016) ldquoThe Phillips Curve Back to the rsquo60srdquo ndash Shows 120630120630 declined over time and is currently very small for headline CPI

But component-level analysis implies that the measure of inflation matters

This exercise Try ten different measures of aggregate inflation

Estimating the Aggregate Phillips Curve

16

CBO

Three measures of headline inflationndash Headline CPI-U (BLS) and Headline PCEPI (BEA) ndash Chained CPI-U (BLS)

Ten Measures of Inflation

17

CBO

Seven measures of core inflationndash Approach 1 Remove the most volatile price changes

XFE CPI-U (BLS) and XFE PCEPI (BEA) Median CPI-U and 16-Trimmed-Mean CPI-U (Federal Reserve Bank of

Cleveland) Rank price changes by size each month and trim the items with price

changes that are above or below a certain threshold ldquoMedianrdquo is just extreme trimming

Trimmed-Mean PCEPI (Federal Reserve Bank of Dallas) Trimming point chosen optimally every month

ndash Approach 2 Remove the most frequent price changes Sticky CPI-U and Sticky-XFE CPI (Federal Reserve Bank of Atlanta)

Price changes every 43 months or longer (Bils and Klenow 2004)

Ten Measures of Inflation (Continued)

18

CBO

Seven Measures of Core Inflation

19

CBO

Relative weight of lagged inflation and constantldquoanchorrdquondash Overall inflation 120572120572 asymp 02 consistent with Blanchard (2016) for headline CPI

Estimation Results I

This figure plots the sum of the estimated coefficients on lagged inflation terms using recursive samples that start in 1998Q1 and end in 2012Q1 2012Q2 hellip and 2018Q1 The Phillips curve equations are ldquounrestrictedrdquo as no assumption was imposed on the value of π before the estimation Instead the intercept of the equation which in theory equals απ was estimated and then the values of α and π were calculated by assuming the long-run restriction on the estimated coefficients

20

CBO

Relative weight of lagged inflation and constantldquoanchorrdquondash Overall inflation 120572120572 asymp 02 consistent with Blanchard (2016) for headline CPIndash Core inflation 120572120572 asymp 05 particularly for non-XFE measures

Estimation Results I (Continued)

This figure plots the sum of the estimated coefficients on lagged inflation terms using recursive samples that start in 1998Q1 and end in 2012Q1 2012Q2 hellip and 2018Q1 The Phillips curve equations are ldquounrestrictedrdquo as no assumption was imposed on the value of π before the estimation Instead the intercept of the equation which in theory equals απ was estimated and then the values of α and π were calculated by assuming the long-run restriction on the estimated coefficients

21

CBO

Further analysis using survey measures of inflation expectations suggests

Inflation expectations by consumers matter more for inflation dynamics than the expectations by professional forecasters for all ten measures of inflation

ndash Consumersrsquo expectations more closely resemble those of firms (Coibion and Gorodnichenko 2015)

ndash Transmission of professional forecastersrsquo views to consumers is weak in a low-inflation environment

ndash Coibion et al (2017) Similar finding for headline CPI

Long-run inflation expectations by consumers are ldquoshock-anchoredrdquo but not ldquolevel-anchoredrdquo (Ball and Mazumder 2011)

ndash Shock-anchoring Transitory shocks not passed to expectationsndash Level-anchoring Expectations tied to a particular level

Estimation Results I (Continued)

22

CBO

Comparing measures of core inflationndash The Phillips curve fits the non-XFE measures very well

Average adj 1198771198772 of non-XFE measures = 07 Ball and Mazumder (2014) Showed this for median CPI

ndash XFEs are ldquooutliersrdquo particularly XFE CPI-U (low 120572120572 and low 1198771198772) Average adj 1198771198772 of XFE measures = 025

Possible explanationndash Fewer goods prices in the non-XFE core measures

Goods price changes are more volatile Goods price changes occur more frequently

Estimation Results II

23

CBO

CPI Components Summary Statistics and Categorization

Mean Standard Deviation

Relative Importance

(2017)

Change in Relative

Importantce 2007-2017

XFE Sticky CPIProbability

(= Median CPI) (1998-2007)

(1) (2) (3) (4) (5) (6) (7)

Core (XFE) ServicesOwners Equivalent of Rent (OER) 27 11 232 298 Y Y 52Rent of Primary Residence 32 11 79 101 Y Y 5Medical Care Services 38 13 67 233 Y Y 2Education Services 49 15 30 058 Y Y 0Transportation Services 27 18 60 -105 Y Y 5

Core (XFE) GoodsApparel -03 25 31 -189 Y N 2New Vehicles 01 23 36 -142 Y N 3Used Cars and Trucks -03 8 21 020 Y N 0Medical Care Goods 29 16 18 059 Y Y 1

Food and EnergyFood away from Home 28 09 59 019 N Y 11Food at Home 21 27 77 -201 N N 6Energy 36 202 75 078 N N 1

CategorizationSummary Statistics

Major CPI Components

The categorization of components into sticky CPI is based on Bryan and Meyer (2010) ldquoAre Some Prices in the CPI More Forward Looking Than Others We Think Sordquo Economic Commentary Federal Reserve Bank of Cleveland httpswwwfrbatlantaorg-mediadocumentsresearchinflationprojectstickypricesticky-price-cpi-supplemental-readingpdf The probabilities of a componentrsquos being the median CPI are based on the ldquorevised methodologyrdquo that split the OER into four regional components For more detail see httpswwwclevelandfedorgenour-researchindicators-and-datamedian-cpirevised-methodologyaspx

CPIU MicroPC - Gd

CPIU MicroPC - Sv

CPIU Components

CPIU MicroPC

Disaggregated PC Model

CPI and PCE weights

Dist of Price Changes (PCE)

lt02017Q12017Q22017Q32017Q42982879399018251530076497118373328794231576306846275112741969116890-22017Q12017Q22017Q32017Q4211846689120427351723027711342023221545531071181461218771897151376142-32017Q12017Q22017Q32017Q413958943933910467193842670834840815394970956904032747859413992923283-52017Q12017Q22017Q32017Q4176887169228583721572899097997604717537133523823844221799519998565525-102017Q12017Q22017Q32017Q482906102250864162821465544005778097459146483527973784429446756549655gt102017Q12017Q22017Q32017Q490482660159195003936531226468855499268986388255841612510045272509943

Percent of Expenditures

24

CBO

The slope of the Phillips curve Flat but steeper for CPIs than PCEPIsndash 120573120573 = 005∿01 for PCEPIs but = 01∿02 for CPIsndash Why Shelter the most cyclically sensitive component has a much larger weight in CPI than in PCEPI

Estimation Results III

This figure plots the sum of the estimated coefficients on lagged inflation terms using recursive samples that start in 1998Q1 and end in 2012Q1 2012Q2 hellip and 2018Q1 The Phillips curve equations are ldquounrestrictedrdquo as no assumption was imposed on the value of π before the estimation Instead the intercept of the equation which in theory equals απ was estimated and then the values of α and π were calculated by assuming the long-run restriction on the estimated coefficients

25

CBO

The slope of the Phillips curve Flat but steeper for CPIs than PCEPIsndash 120573120573 = 005∿01 for PCEPIs but = 01∿02 for CPIsndash Why Shelter the most cyclically sensitive component has a much larger weight in CPI than in PCEPI

Estimation Results III (Continued)

This figure plots the sum of the estimated coefficients on lagged inflation terms using recursive samples that start in 1998Q1 and end in 2012Q1 2012Q2 hellip and 2018Q1 The Phillips curve equations are ldquounrestrictedrdquo as no assumption was imposed on the value of π before the estimation Instead an intercept of the equation which in theory equals απ was estimated and then the value of α and π were calculated by assuming the long-run restriction on the estimated coefficients

26

CBO

Reviewing the Findings

27

CBO

Phillips-curve analysis at the component level provides insight intondash Cyclical sensitivity of aggregate inflation

For most service components and food inflation process is pro-cyclical For most non-food good components inflation process is not pro-cyclical

Need better understanding and models for goods price inflationndash Difference in the behaviors of various inflation measures

CPI is more cyclically sensitive than PCEPI because shelter has larger share in CPI

Non-XFE measures of core inflation better capture movements in trend inflation because they contain fewer noisy goods components

The aggregate Phillips curve has shifted away from ldquoaccelerationistrdquo toward an ldquoanchoredrdquo form but the process appears incomplete

ndash Need better understanding of the formation process of inflation expectations particularly those of consumers and firms

Conclusions

28

CBO

Abdih Yasser Ravi Balakrishnan and Baoping Shang ldquoWhat Is Keeping US Core Inflation Low Insights From a Bottom-Up Approachrdquo International Monetary Fund 2016

Ball Laurence and Sandeep Mazumder ldquoInflation Dynamics and the Great Recessionrdquo Brookings Papers on Economic Activity (2011) 337ndash406

Blanchard Olivier ldquoThe Phillips Curve Back to the rsquo60s American Economic Review 1065 (2016) 31ndash34

Bils Mark and Peter J Klenow ldquoSome Evidence on the Importance of Sticky Pricesrdquo Journal of Political Economy 1125 (2004) 947ndash985

Coibion Olivier and Yuriy Gorodnichenko ldquoIs the Phillips Curve Alive and Well After All Inflation Expectations and the Missing Disinflationrdquo American Economic Journal Macroeconomics 71 (2015) 197ndash232

References

29

CBO

Coibion Olivier Yuriy Gorodnichenko and Rupal Kamdar ldquoThe Formation of Expectations Inflation and the Phillips Curverdquo No w23304 National Bureau of Economic Research 2017

Goolsbee Austan D and Peter J Klenow ldquoInternet Rising Prices Falling Measuring Inflation in a World of E-Commercerdquo AEA Papers and Proceedings Vol 108 2018

Stock J and Mark Watson ldquoSlack and Cyclically Sensitive Inflationrdquo ECB Forum on Central Banking Sintra Portugal 2018

Struyven Dann ldquoWhich Prices Still Respond to Slackrdquo Goldman Sachs Economics Research (October 31 2017)

References (Continued)

  • Inflation and the Phillips Curve
  • Inflation 1948ndash2018
  • Inflation Expectations 1948ndash2018
  • Unemployment 1948ndash2018
  • Structure of CBOrsquos Model for the Personal Consumption Expenditures (PCE) Price Index
  • Expectation-Augmented Phillips Curve
  • Slide Number 7
  • Phillips Curve Model at the Component Level
  • Shelter Inflation
  • Auto Inflation
  • Services Largely Pro-Cyclical
  • Goods Largely Not Pro-Cyclical Except Food
  • Goods Versus Services Possible Explanations
  • Forecasting Inflation at the Component Level
  • Slide Number 15
  • Estimating the Aggregate Phillips Curve
  • Ten Measures of Inflation
  • Ten Measures of Inflation (Continued)
  • Seven Measures of Core Inflation
  • Estimation Results I
  • Estimation Results I (Continued)
  • Estimation Results I (Continued)
  • Estimation Results II
  • CPI Components Summary Statistics and Categorization
  • Estimation Results III
  • Estimation Results III (Continued)
  • Slide Number 27
  • Conclusions
  • References
  • References (Continued)
Current vintage data
Dec-16 Jan-17 Feb-17 Mar-17 Apr-17 May-17 Jun-17 Jul-17 Aug-17 Sep-17 Oct-17 Nov-17 Dec-17
Rose at 0-2 rate 314 179 190 266 178 158 181 206 275 165 181 224 251
Rose at 2-3 rate 82 137 111 171 191 280 111 130 116 216 88 97 39
Rose at 3-5 rate 240 198 253 80 126 136 209 161 241 125 231 258 177
Rose at 5-10 rate 100 122 57 70 71 85 91 60 51 114 50 122 81
Rose faster than 10 rate 67 137 108 27 151 55 75 116 65 97 159 82 134
227 281 387 282 286 334 328 253 283 291 218 317
212 172 215455310712 218771897151
140 194 153949709569 74785941399
177 157 175371335238 221799519999
83 82 74591464835 84429446757
90 94 92689863883 125100452725
298 301 287942315763 275112741969
2017Q1 2017Q2 2017Q3 2017Q4
Fell 2983 3008 2879 2751
Rose at 0-2 rate 2118 1723 2155 2188
Rose at 2-3 rate 1396 1938 1539 748
Rose at 3-5 rate 1769 1573 1754 2218
Rose at 5-10 rate 829 821 746 844
Rose faster than 10 rate 905 937 927 1251
Major Sectors CPI PCEPI
Housing 426 183
Health Care 85 231
Food and Beverages 146 137
Transportation 153 90
Recreation 57 89
Education and Communication 70 46
Apparel 30 29
Financial Services 02 47
Other 30 147
Total 100 100
Data December 2016
Naiumlve Phillips-Curve-Style Models (Sample 1998-2017)
8 9 10 11
Variables Constant Lagged Inflation Unemployment Gap Adjusted R2 Order of AR Order of Lagged Rucgap
Owners Equivalent of Rent 118 062 -022 078 1 1
(48) (79) -(40)
Rent of Primary Residence 141 060 -018 084 1 4
(48) (74) -(33)
Medical Care Services 131 067 -007 032 2
(27) (58) -(09)
Education Services 023 095 -009 078 4 2
(07) (149) -(16)
Transportation Services 26 01 -00 018 1 3
(59) (05) -(02)
Apparel -060 027 043 016 4 0
-(19) (15) (23)
New Vehicles -046 003 065 018 1 0
-(17) (03) (39)
Used Cars and Trucks -001 031 092 028 2 4
-(00) (35) (19)
Medical Care Goods 23 02 -01 023 3
(51) (14) -(08)
Food away from Home 116 060 -008 050 1 2
(40) (62) -(15)
Food at Home 105 063 -009 059 1
(37) (86) -(07)
Energy 983 -022 -061 048 1
(48) -(22) -(06)
Unemployment Gap Lagged Inflation Constant Adjusted R2 Obs Durbin-Watson Statistic Order of Lagged Inflation Order of Lagged Unemployment Gap
Services
Owners Equivalent of Rent -021 062 113 078 83 171 1 1
000 000 024
Rent of Primary Residence -015 067 116 084 83 217 1 5
000 000 026
Food away from Home -008 061 108 057 83 251 2 2
007 000 025
Medical Care Services -005 070 115 034 83 201 2 0
051 000 045
Education Services -007 093 030 081 83 202 4 2
016 000 029
Transportation Services -002 -011 320 016 83 198 2 3
087 027 036
Goods
Apparel 050 010 -054 008 83 192 4 0
001 039 032
New Vehicles 038 002 -034 034 83 186 1 0
001 084 023
Used Cars and Trucks 038 018 -019 034 83 174 2 4
047 013 082
Food at Home -005 065 103 057 83 237 1 0
072 000 027
Medical Care Goods -005 046 169 056 83 196 3 0
053 000 028
Controlling Inflnm + Inflne
Unemployment Gap Lagged Inflation Constant Adjusted R2 Observations Durbin-Watson Statistic Order of Lagged Inflation Order of Lagged Unemployment Gap
Owners Equivalent of Rent (OER) -0212 0633 1120 077 80 179 1 1
(0058) (0082) (0260)
Rent of Primary Residence -0171 0604 1395 084 80 201 1 5
(0056) (0085) (0308)
Medical Care Services -0070 0693 1191 031 80 205 2 0
(0083) (0123) (0514)
Education Services -0087 0947 0296 078 80 204 4 2
(0055) (0067) (0354)
Transportation Services -0035 0154 2284 019 80 203 2 3
(0130) (0160) (0485)
Apparel 0416 0305 -0594 015 80 187 4 0
(0187) (0178) (0327)
New Vehicles 0655 0021 -0494 017 80 200 1 0
(0169) (0112) (0287)
Used Cars and Trucks 0410 0215 -0860 038 80 185 2 4
(0535) (0114) (0902)
Medical Care Goods -0082 0202 2251 022 80 192 3 0
(0105) (0141) (0458)
Food away from Home -0086 0613 1159 059 80 236 2 2
(0132) (0074) (0302)
Food at Home -0065 0751 0781 053 80 216 1 0
(0049) (0116) (0340)
Energy -0735 0068 2120 096 80 134 2 0
(0311) (0035) (0651)
Controlling Inflnm
Unemployment Gap Lagged Inflation Constant Adjusted R2 Observations Durbin-Watson Statistic Order of Lagged Inflation Order of Lagged Unemployment Gap
Core (XFE) Services
Owners Equivalent of Rent (OER) -0212 0632 1129 078 80 180 1 1
(0058) (0081) (0257)
Rent of Primary Residence -0171 0605 1393 084 80 201 1 5
(0055) (0084) (0302)
Medical Care Services -0068 0696 1189 032 80 205 2 0
(0082) (0122) (0511)
Education Services -0087 0943 0287 078 80 201 4 2
(0055) (0067) (0353)
Transportation Services -0030 0076 2602 017 80 202 2 3
(0131) (0152) (0440)
Apparel 0426 0292 -0544 016 80 189 4 0
(0186) (0176) (0315)
New Vehicles 0658 0023 -0436 017 80 196 1 0
(0168) (0112) (0272)
Used Cars and Trucks 0399 0190 -0322 036 80 171 2 4
(0543) (0115) (0861)
Medical Care Goods -0080 0203 2289 022 80 193 3 0
(0104) (0140) (0453)
Food away from Home -0090 0628 1038 059 80 237 2 2
(0132) (0073) (0282)
Food at Home -0064 0754 0741 053 80 216 1 0
(0049) (0116) (0338)
Energy -0678 -0305 10270 049 80 198 2 0
(1085) (0114) (2053)
Major CPI Components Summary Statistics Categorization
Mean Standard Deviation Relative Importance (2017) Change in Relative Importantce 2007-2017 XFE Sticky CPI Probability (= Median CPI) (1998-2007)
1 2 3 4 5 6 7
Core (XFE) Services
Owners Equivalent of Rent (OER) 27 11 232 298 Y Y 52
Rent of Primary Residence 32 11 79 101 Y Y 5
Medical Care Services 38 13 67 233 Y Y 2
Education Services 49 15 30 058 Y Y 0
Transportation Services 27 18 60 -105 Y Y 5
Core (XFE) Goods
Apparel -03 25 31 -189 Y N 2
New Vehicles 01 23 36 -142 Y N 3
Used Cars and Trucks -03 8 21 020 Y N 0
Medical Care Goods 29 16 18 059 Y Y 1
Food and Energy
Food away from Home 28 09 59 019 N Y 11
Food at Home 21 27 77 -201 N N 6
Energy 36 202 75 078 N N 1
Unemployment Gap Lagged Inflation Constant Adjusted R2 Observations Durbin-Watson Statistic
PCE Services Less Energy -014 032 191 046 83 185
(000) (001) (035)
PCE Housing Services -023 058 129 080 83 208
(000) (000) (024)
CPI-U Owners Equivalent of Rent -021 062 113 078 83 171
(000) (000) (024)
CPI-U Rent of Primary Residence -015 067 116 084 83 217
(000) (000) (026)
PCE Health Care Services -006 062 092 042 83 207
(038) (000) (026)
PCE Services Less Energy Rent of Shelter amp Health care -004 035 172 038 83 226
(050) (000) (028)
CPI-U Services Less Energy Services amp Rent of Shelter -015 040 188 034 83 218
(001) (000) (040)
CPI-U Medical Care Services -005 070 115 034 83 201
(051) (000) (045)
CPI-U Food away from Home -009 062 105 057 83 264
(005) (000) (025)
CPI-U Education Services -007 093 030 081 83 202
(016) (000) (029)
CPI-U Transportation Services -002 -011 320 016 83 198
(087) (027) (036)
Unemployment Gap Lagged Inflation Constant Adjusted R2 Observations Durbin-Watson Statistic
PCE Durable Goods 008 028 -154 027 83 183
(031) (001) (024)
PCE Motor Vehicles and Parts 031 030 -021 043 83 178
(005) (000) (025)
PCE Video Audio Photo amp 016 060 -395 044 83 222
Information Processing Equipment amp Media (034) (000) (087)
PCE Other Durable Goods (including Medical Equipments) -010 038 -050 027 83 188
(028) (000) (019)
PCE Nondurable Goods Less Energy -014 073 039 044 83 203
(005) (000) (017)
PCE Food amp Beverage Purchased for Off-Premises Consumption -024 066 071 055 83 226
(004) (000) (024)
CPI-U Food at Home -027 063 082 052 83 216
(005) (000) (028)
CPI-U Alcoholic Beverages -017 034 147 016 83 209
(004) (000) (026)
PCE Pharmaceutical amp Other Medical Products -002 033 202 020 83 173
(088) (000) (039)
PCE Other Nondurable Goods 008 025 000 042 83 179
(046) (001) (018)
CPI-U Apparel 054 014 -069 022 83 191
(000) (018) (030)
Current vintage data
Dec-16 Jan-17 Feb-17 Mar-17 Apr-17 May-17 Jun-17 Jul-17 Aug-17 Sep-17 Oct-17 Nov-17 Dec-17
Rose at 0-2 rate 314 179 190 266 178 158 181 206 275 165 181 224 251
Rose at 2-3 rate 82 137 111 171 191 280 111 130 116 216 88 97 39
Rose at 3-5 rate 240 198 253 80 126 136 209 161 241 125 231 258 177
Rose at 5-10 rate 100 122 57 70 71 85 91 60 51 114 50 122 81
Rose faster than 10 rate 67 137 108 27 151 55 75 116 65 97 159 82 134
227 281 387 282 286 334 328 253 283 291 218 317
212 172 215455310712 218771897151
140 194 153949709569 74785941399
177 157 175371335238 221799519999
83 82 74591464835 84429446757
90 94 92689863883 125100452725
298 301 287942315763 275112741969
2017Q1 2017Q2 2017Q3 2017Q4
Fell 2983 3008 2879 2751
Rose at 0-2 rate 2118 1723 2155 2188
Rose at 2-3 rate 1396 1938 1539 748
Rose at 3-5 rate 1769 1573 1754 2218
Rose at 5-10 rate 829 821 746 844
Rose faster than 10 rate 905 937 927 1251
Major Sectors CPI PCEPI
Housing 426 183
Health Care 85 231
Food and Beverages 146 137
Transportation 153 90
Recreation 57 89
Education and Communication 70 46
Apparel 30 29
Financial Services 02 47
Other 30 147
Total 100 100
Data December 2016
Naiumlve Phillips-Curve-Style Models (Sample 1998-2017)
8 9 10 11
Variables Constant Lagged Inflation Unemployment Gap Adjusted R2 Order of AR Order of Lagged Rucgap
Owners Equivalent of Rent 118 062 -022 078 1 1
(48) (79) -(40)
Rent of Primary Residence 141 060 -018 084 1 4
(48) (74) -(33)
Medical Care Services 131 067 -007 032 2
(27) (58) -(09)
Education Services 023 095 -009 078 4 2
(07) (149) -(16)
Transportation Services 26 01 -00 018 1 3
(59) (05) -(02)
Apparel -060 027 043 016 4 0
-(19) (15) (23)
New Vehicles -046 003 065 018 1 0
-(17) (03) (39)
Used Cars and Trucks -001 031 092 028 2 4
-(00) (35) (19)
Medical Care Goods 23 02 -01 023 3
(51) (14) -(08)
Food away from Home 116 060 -008 050 1 2
(40) (62) -(15)
Food at Home 105 063 -009 059 1
(37) (86) -(07)
Energy 983 -022 -061 048 1
(48) -(22) -(06)
Unemployment Gap Lagged Inflation Constant Adjusted R2 Obs Durbin-Watson Statistic Order of Lagged Inflation Order of Lagged Unemployment Gap
Services
Owners Equivalent of Rent -021 062 113 078 83 171 1 1
000 000 024
Rent of Primary Residence -015 067 116 084 83 217 1 5
000 000 026
Food away from Home -008 061 108 057 83 251 2 2
007 000 025
Medical Care Services -005 070 115 034 83 201 2 0
051 000 045
Education Services -007 093 030 081 83 202 4 2
016 000 029
Transportation Services -002 -011 320 016 83 198 2 3
087 027 036
Goods
Apparel 050 010 -054 008 83 192 4 0
001 039 032
New Vehicles 038 002 -034 034 83 186 1 0
001 084 023
Used Cars and Trucks 038 018 -019 034 83 174 2 4
047 013 082
Food at Home -005 065 103 057 83 237 1 0
072 000 027
Medical Care Goods -005 046 169 056 83 196 3 0
053 000 028
Controlling Inflnm + Inflne
Unemployment Gap Lagged Inflation Constant Adjusted R2 Observations Durbin-Watson Statistic Order of Lagged Inflation Order of Lagged Unemployment Gap
Owners Equivalent of Rent (OER) -0212 0633 1120 077 80 179 1 1
(0058) (0082) (0260)
Rent of Primary Residence -0171 0604 1395 084 80 201 1 5
(0056) (0085) (0308)
Medical Care Services -0070 0693 1191 031 80 205 2 0
(0083) (0123) (0514)
Education Services -0087 0947 0296 078 80 204 4 2
(0055) (0067) (0354)
Transportation Services -0035 0154 2284 019 80 203 2 3
(0130) (0160) (0485)
Apparel 0416 0305 -0594 015 80 187 4 0
(0187) (0178) (0327)
New Vehicles 0655 0021 -0494 017 80 200 1 0
(0169) (0112) (0287)
Used Cars and Trucks 0410 0215 -0860 038 80 185 2 4
(0535) (0114) (0902)
Medical Care Goods -0082 0202 2251 022 80 192 3 0
(0105) (0141) (0458)
Food away from Home -0086 0613 1159 059 80 236 2 2
(0132) (0074) (0302)
Food at Home -0065 0751 0781 053 80 216 1 0
(0049) (0116) (0340)
Energy -0735 0068 2120 096 80 134 2 0
(0311) (0035) (0651)
Controlling Inflnm
Unemployment Gap Lagged Inflation Constant Adjusted R2 Observations Durbin-Watson Statistic Order of Lagged Inflation Order of Lagged Unemployment Gap
Core (XFE) Services
Owners Equivalent of Rent (OER) -0212 0632 1129 078 80 180 1 1
(0058) (0081) (0257)
Rent of Primary Residence -0171 0605 1393 084 80 201 1 5
(0055) (0084) (0302)
Medical Care Services -0068 0696 1189 032 80 205 2 0
(0082) (0122) (0511)
Education Services -0087 0943 0287 078 80 201 4 2
(0055) (0067) (0353)
Transportation Services -0030 0076 2602 017 80 202 2 3
(0131) (0152) (0440)
Apparel 0426 0292 -0544 016 80 189 4 0
(0186) (0176) (0315)
New Vehicles 0658 0023 -0436 017 80 196 1 0
(0168) (0112) (0272)
Used Cars and Trucks 0399 0190 -0322 036 80 171 2 4
(0543) (0115) (0861)
Medical Care Goods -0080 0203 2289 022 80 193 3 0
(0104) (0140) (0453)
Food away from Home -0090 0628 1038 059 80 237 2 2
(0132) (0073) (0282)
Food at Home -0064 0754 0741 053 80 216 1 0
(0049) (0116) (0338)
Energy -0678 -0305 10270 049 80 198 2 0
(1085) (0114) (2053)
Major CPI Components Summary Statistics Categorization
Mean Standard Deviation Relative Importance (2017Q4) Change in Relative Importantce CPI Excluding Food and Energy Sticky CPI Probability (= Median CPI) (1998-2007)
1 2 3 4 5 6 7
Core (XFE) Services
Owners Equivalent of Rent (OER) 27 11 232 298 Y Y 52
Rent of Primary Residence 32 11 79 101 Y Y 5
Medical Care Services 38 13 67 233 Y Y 2
Education Services 49 15 30 058 Y Y 0
Transportation Services 27 18 60 -105 Y Y 5
Core (XFE) Goods
Apparel -03 25 31 -189 Y N 2
New Vehicles 01 23 36 -142 Y N 3
Used Cars and Trucks -03 8 21 020 Y N 0
Medical Care Goods 29 16 18 059 Y Y 1
Food and Energy
Food away from Home 28 09 59 019 N Y 11
Food at Home 21 27 77 -201 N N 6
Energy 36 202 75 078 N N 1
Unemployment Gap Lagged Inflation Constant Adjusted R2 Observations Durbin-Watson Statistic
PCE Services Less Energy -014 032 191 046 83 185
(000) (001) (035)
PCE Housing Services -023 058 129 080 83 208
(000) (000) (024)
CPI-U Owners Equivalent of Rent -021 062 113 078 83 171
(000) (000) (024)
CPI-U Rent of Primary Residence -015 067 116 084 83 217
(000) (000) (026)
PCE Health Care Services -006 062 092 042 83 207
(038) (000) (026)
PCE Services Less Energy Rent of Shelter amp Health care -004 035 172 038 83 226
(050) (000) (028)
CPI-U Services Less Energy Services amp Rent of Shelter -015 040 188 034 83 218
(001) (000) (040)
CPI-U Medical Care Services -005 070 115 034 83 201
(051) (000) (045)
CPI-U Food away from Home -009 062 105 057 83 264
(005) (000) (025)
CPI-U Education Services -007 093 030 081 83 202
(016) (000) (029)
CPI-U Transportation Services -002 -011 320 016 83 198
(087) (027) (036)
Unemployment Gap Lagged Inflation Constant Adjusted R2 Observations Durbin-Watson Statistic
PCE Durable Goods 008 028 -154 027 83 183
(031) (001) (024)
PCE Motor Vehicles and Parts 031 030 -021 043 83 178
(005) (000) (025)
PCE Video Audio Photo amp 016 060 -395 044 83 222
Information Processing Equipment amp Media (034) (000) (087)
PCE Other Durable Goods (including Medical Equipments) -010 038 -050 027 83 188
(028) (000) (019)
PCE Nondurable Goods Less Energy -014 073 039 044 83 203
(005) (000) (017)
PCE Food amp Beverage Purchased for Off-Premises Consumption -024 066 071 055 83 226
(004) (000) (024)
CPI-U Food at Home -027 063 082 052 83 216
(005) (000) (028)
CPI-U Alcoholic Beverages -017 034 147 016 83 209
(004) (000) (026)
PCE Pharmaceutical amp Other Medical Products -002 033 202 020 83 173
(088) (000) (039)
PCE Other Nondurable Goods 008 025 000 042 83 179
(046) (001) (018)
CPI-U Apparel 054 014 -069 022 83 191
(000) (018) (030)
Current vintage data
Dec-16 Jan-17 Feb-17 Mar-17 Apr-17 May-17 Jun-17 Jul-17 Aug-17 Sep-17 Oct-17 Nov-17 Dec-17
Rose at 0-2 rate 314 179 190 266 178 158 181 206 275 165 181 224 251
Rose at 2-3 rate 82 137 111 171 191 280 111 130 116 216 88 97 39
Rose at 3-5 rate 240 198 253 80 126 136 209 161 241 125 231 258 177
Rose at 5-10 rate 100 122 57 70 71 85 91 60 51 114 50 122 81
Rose faster than 10 rate 67 137 108 27 151 55 75 116 65 97 159 82 134
227 281 387 282 286 334 328 253 283 291 218 317
212 172 215455310712 218771897151
140 194 153949709569 74785941399
177 157 175371335238 221799519999
83 82 74591464835 84429446757
90 94 92689863883 125100452725
298 301 287942315763 275112741969
2017Q1 2017Q2 2017Q3 2017Q4
Fell 2983 3008 2879 2751
Rose at 0-2 rate 2118 1723 2155 2188
Rose at 2-3 rate 1396 1938 1539 748
Rose at 3-5 rate 1769 1573 1754 2218
Rose at 5-10 rate 829 821 746 844
Rose faster than 10 rate 905 937 927 1251
Major Sectors CPI PCEPI
Housing 426 183
Health Care 85 231
Food and Beverages 146 137
Transportation 153 90
Recreation 57 89
Education and Communication 70 46
Apparel 30 29
Financial Services 02 47
Other 30 147
Total 100 100
Data December 2016
Naiumlve Phillips-Curve-Style Models (Sample 1998-2017)
8 9 10 11
Variables Constant Lagged Inflation Unemployment Gap Adjusted R2 Order of AR Order of Lagged Rucgap
Owners Equivalent of Rent 118 062 -022 078 1 1
(48) (79) -(40)
Rent of Primary Residence 141 060 -018 084 1 4
(48) (74) -(33)
Medical Care Services 131 067 -007 032 2
(27) (58) -(09)
Education Services 023 095 -009 078 4 2
(07) (149) -(16)
Transportation Services 26 01 -00 018 1 3
(59) (05) -(02)
Apparel -060 027 043 016 4 0
-(19) (15) (23)
New Vehicles -046 003 065 018 1 0
-(17) (03) (39)
Used Cars and Trucks -001 031 092 028 2 4
-(00) (35) (19)
Medical Care Goods 23 02 -01 023 3
(51) (14) -(08)
Food away from Home 116 060 -008 050 1 2
(40) (62) -(15)
Food at Home 105 063 -009 059 1
(37) (86) -(07)
Energy 983 -022 -061 048 1
(48) -(22) -(06)
Unemployment Gap Lagged Inflation Constant Adjusted R2 Obs Durbin-Watson Statistic Order of Lagged Inflation Order of Lagged Unemployment Gap
Services
Owners Equivalent of Rent -021 062 113 078 83 171 1 1
000 000 024
Rent of Primary Residence -015 067 116 084 83 217 1 5
000 000 026
Food away from Home -008 061 108 057 83 251 2 2
007 000 025
Medical Care Services -005 070 115 034 83 201 2 0
051 000 045
Education Services -007 093 030 081 83 202 4 2
016 000 029
Transportation Services -002 -011 320 016 83 198 2 3
087 027 036
Goods
Apparel 050 010 -054 008 83 192 4 0
001 039 032
New Vehicles 038 002 -034 034 83 186 1 0
001 084 023
Used Cars and Trucks 038 018 -019 034 83 174 2 4
047 013 082
Food at Home -005 065 103 057 83 237 1 0
072 000 027
Medical Care Goods -005 046 169 056 83 196 3 0
053 000 028
Controlling Inflnm + Inflne
Unemployment Gap Lagged Inflation Constant Adjusted R2 Observations Durbin-Watson Statistic Order of Lagged Inflation Order of Lagged Unemployment Gap
Owners Equivalent of Rent (OER) -0212 0633 1120 077 80 179 1 1
(0058) (0082) (0260)
Rent of Primary Residence -0171 0604 1395 084 80 201 1 5
(0056) (0085) (0308)
Medical Care Services -0070 0693 1191 031 80 205 2 0
(0083) (0123) (0514)
Education Services -0087 0947 0296 078 80 204 4 2
(0055) (0067) (0354)
Transportation Services -0035 0154 2284 019 80 203 2 3
(0130) (0160) (0485)
Apparel 0416 0305 -0594 015 80 187 4 0
(0187) (0178) (0327)
New Vehicles 0655 0021 -0494 017 80 200 1 0
(0169) (0112) (0287)
Used Cars and Trucks 0410 0215 -0860 038 80 185 2 4
(0535) (0114) (0902)
Medical Care Goods -0082 0202 2251 022 80 192 3 0
(0105) (0141) (0458)
Food away from Home -0086 0613 1159 059 80 236 2 2
(0132) (0074) (0302)
Food at Home -0065 0751 0781 053 80 216 1 0
(0049) (0116) (0340)
Energy -0735 0068 2120 096 80 134 2 0
(0311) (0035) (0651)
Controlling Inflnm
Unemployment Gap Lagged Inflation Constant Adjusted R2 Observations Durbin-Watson Statistic Order of Lagged Inflation Order of Lagged Unemployment Gap
Core (XFE) Services
Owners Equivalent of Rent (OER) -0212 0632 1129 078 80 180 1 1
(0058) (0081) (0257)
Rent of Primary Residence -0171 0605 1393 084 80 201 1 5
(0055) (0084) (0302)
Medical Care Services -0068 0696 1189 032 80 205 2 0
(0082) (0122) (0511)
Education Services -0087 0943 0287 078 80 201 4 2
(0055) (0067) (0353)
Transportation Services -0030 0076 2602 017 80 202 2 3
(0131) (0152) (0440)
Apparel 0426 0292 -0544 016 80 189 4 0
(0186) (0176) (0315)
New Vehicles 0658 0023 -0436 017 80 196 1 0
(0168) (0112) (0272)
Used Cars and Trucks 0399 0190 -0322 036 80 171 2 4
(0543) (0115) (0861)
Medical Care Goods -0080 0203 2289 022 80 193 3 0
(0104) (0140) (0453)
Food away from Home -0090 0628 1038 059 80 237 2 2
(0132) (0073) (0282)
Food at Home -0064 0754 0741 053 80 216 1 0
(0049) (0116) (0338)
Energy -0678 -0305 10270 049 80 198 2 0
(1085) (0114) (2053)
Major CPI Components Summary Statistics Categorization
Mean Standard Deviation Relative Importance (2017Q4) Change in Relative Importantce CPI Excluding Food and Energy Sticky CPI Probability (= Median CPI) (1998-2007)
1 2 3 4 5 6 7
Core (XFE) Services
Owners Equivalent of Rent (OER) 27 11 232 298 Y Y 52
Rent of Primary Residence 32 11 79 101 Y Y 5
Medical Care Services 38 13 67 233 Y Y 2
Education Services 49 15 30 058 Y Y 0
Transportation Services 27 18 60 -105 Y Y 5
Core (XFE) Goods
Apparel -03 25 31 -189 Y N 2
New Vehicles 01 23 36 -142 Y N 3
Used Cars and Trucks -03 8 21 020 Y N 0
Medical Care Goods 29 16 18 059 Y Y 1
Food and Energy
Food away from Home 28 09 59 019 N Y 11
Food at Home 21 27 77 -201 N N 6
Energy 36 202 75 078 N N 1
Unemployment Gap Lagged Inflation Constant Adjusted R2 Observations Durbin-Watson Statistic
PCE Services Less Energy -014 032 191 046 83 185
(000) (001) (035)
PCE Housing Services -023 058 129 080 83 208
(000) (000) (024)
CPI-U Owners Equivalent of Rent -021 062 113 078 83 171
(000) (000) (024)
CPI-U Rent of Primary Residence -015 067 116 084 83 217
(000) (000) (026)
PCE Health Care Services -006 062 092 042 83 207
(038) (000) (026)
PCE Services Less Energy Rent of Shelter amp Health care -004 035 172 038 83 226
(050) (000) (028)
CPI-U Services Less Energy Services amp Rent of Shelter -015 040 188 034 83 218
(001) (000) (040)
CPI-U Medical Care Services -005 070 115 034 83 201
(051) (000) (045)
CPI-U Food away from Home -009 062 105 057 83 264
(005) (000) (025)
CPI-U Education Services -007 093 030 081 83 202
(016) (000) (029)
CPI-U Transportation Services -002 -011 320 016 83 198
(087) (027) (036)
Unemployment Gap Lagged Inflation Constant Adjusted R2 Observations Durbin-Watson Statistic
PCE Durable Goods 008 028 -154 027 83 183
(031) (001) (024)
PCE Motor Vehicles and Parts 031 030 -021 043 83 178
(005) (000) (025)
PCE Video Audio Photo amp 016 060 -395 044 83 222
Information Processing Equipment amp Media (034) (000) (087)
PCE Other Durable Goods (including Medical Equipments) -010 038 -050 027 83 188
(028) (000) (019)
PCE Nondurable Goods Less Energy -014 073 039 044 83 203
(005) (000) (017)
PCE Food amp Beverage Purchased for Off-Premises Consumption -024 066 071 055 83 226
(004) (000) (024)
CPI-U Food at Home -027 063 082 052 83 216
(005) (000) (028)
CPI-U Alcoholic Beverages -017 034 147 016 83 209
(004) (000) (026)
PCE Pharmaceutical amp Other Medical Products -002 033 202 020 83 173
(088) (000) (039)
PCE Other Nondurable Goods 008 025 000 042 83 179
(046) (001) (018)
CPI-U Apparel 054 014 -069 022 83 191
(000) (018) (030)
Page 3: Inflation and the Phillips Curve · Phillips curve is so flat Method: Estimating Phillips curve equations at the component level – Measure of slack: The unemployment gap (CBO’s

2

CBO

Inflation Expectations 1948ndash2018

3

CBO

Unemployment 1948ndash2018

4

CBO

This flow chart shows the structure of CBOrsquos inflation model for the PCEPI as well as the spending shares for its components Those components include PCNFOOD Food amp Beverage Purchases for Off-Premises Consumption PCNENERGY Gasoline amp Other Energy Goods PCSENERGY Electricity and Gas PCDELEC Video Audio Photo amp Info Processing Equipment amp Media PCDMVAP Motor Vehicles amp Parts PCDMED Therapeutic Appliances amp Equipment PCDOTH Other Durable Goods (CBOrsquos calculation) PCNMED Pharmaceutical amp Other Medical Products PCNOTH Other Nondurable Goods (CBOrsquos calculation) PCSHOUS Housing PCSMED Health Care Services and PCSOTH Other Services (CBOrsquos calculation)

Structure of CBOrsquos Model for the Personal Consumption Expenditures (PCE) Price Index

5

CBO

120587120587119905119905= 119864119864119905119905120587120587119905119905+1 minus 120631120631 119880119880119905119905 minus 119880119880lowast + 120574120574119885119885119905119905 + 120598120598119905119905

Determinants of inflationndash 119864119864119905119905120587120587119905119905+1 Inflation expectationsndash 120573120573 119880119880119905119905 minus 119880119880lowast Unemployment gap or other measures of slack in the economyndash 120574120574119885119885119905119905 Supply-side shocks (for example relative price of imports energy etc)

Issue 1 Cyclical sensitivity of inflationndash For the price index of personal consumption expenditures (PCEPI) excluding food

and energy (ldquoXFErdquo or ldquocore-XFErdquo) 120573120573 has declined from 03~04 in the 1970s to 005~01 in the most recent decades

ndash Does inflation still respond to slack

Issue 2 The form of inflation expectationsndash ldquoAccelerationistrdquo 119864119864119905119905120587120587119905119905+1= 119860119860 119871119871 120587120587119905119905minus1 (distributed lags of inflation)ndash ldquoAnchoredrdquo 119864119864119905119905120587120587119905119905+1= 120587120587lowast (constant)ndash Combined 119864119864119905119905120587120587119905119905+1=120630120630119860119860(119871119871)120587120587119905119905minus1 + (120783120783 minus 120630120630)120587120587lowast

Expectation-Augmented Phillips Curve

6

CBO

Cyclical Sensitivity of InflationGoods Versus Services

7

CBO

Goal Understanding why the aggregate Phillips curve is so flat

Method Estimating Phillips curve equations at the component levelndash Measure of slack The unemployment gap (CBOrsquos estimate)ndash Sample 1998Q1ndash2018Q3 (stable inflation expectations)ndash Control for Relative price of imports and energy goods outliers (for example ldquocash

for clunkersrdquo)ndash Similar to Stock and Watson (2018) Struyven (2017)

Main Finding Divergence between goods and services in terms of cyclical sensitivity

ndash Services Remained largely pro-cyclicalmdashfor example shelterndash Goods Not pro-cyclical in the past two decades

Dampening the slope of the aggregate Phillips curve Exception Food prices

Phillips Curve Model at the Component Level

8

CBO

Shelter Inflation

9

CBO

Auto Inflation

10

CBO

Services Largely Pro-Cyclical

Unemployment Gap

Lagged Inflation Constant Adjusted R2

PCE Services Less Energy -014 032 191 046(000) (001) (035)

PCE Housing Services -023 058 129 080(000) (000) (024)

CPI-U Owners Equivalent of Rent -021 062 113 078(000) (000) (024)

CPI-U Rent of Primary Residence -015 067 116 084(000) (000) (026)

PCE Health Care Services -006 062 092 042(038) (000) (026)

PCE Services Less Energy Rent of Shelter amp Health care -004 035 172 038(050) (000) (028)

CPI-U Services Less Energy Services amp Rent of Shelter -015 040 188 034(001) (000) (040)

CPI-U Medical Care Services -005 070 115 034(051) (000) (045)

CPI-U Food away from Home -009 062 105 057(005) (000) (025)

CPI-U Education Services -007 093 030 081(016) (000) (029)

CPI-U Transportation Services -002 -011 320 016(087) (027) (036)

CPIU MicroPC - Gd

CPIU MicroPC - Sv

CPIU Components

CPIU MicroPC

Disaggregated PC Model

CPI and PCE weights

Dist of Price Changes (PCE)

lt02017Q12017Q22017Q32017Q42982879399018251530076497118373328794231576306846275112741969116890-22017Q12017Q22017Q32017Q4211846689120427351723027711342023221545531071181461218771897151376142-32017Q12017Q22017Q32017Q413958943933910467193842670834840815394970956904032747859413992923283-52017Q12017Q22017Q32017Q4176887169228583721572899097997604717537133523823844221799519998565525-102017Q12017Q22017Q32017Q482906102250864162821465544005778097459146483527973784429446756549655gt102017Q12017Q22017Q32017Q490482660159195003936531226468855499268986388255841612510045272509943

Percent of Expenditures

11

CBO

Goods Largely Not Pro-Cyclical Except Food

Unemployment Gap

Lagged Inflation Constant Adjusted R2

PCE Durable Goods 008 028 -154 027(031) (001) (024)

PCE Motor Vehicles and Parts 031 030 -021 043(005) (000) (025)

PCE Video Audio Photo amp 016 060 -395 044 Information Processing Equipment amp Media (034) (000) (087)

PCE Other Durable Goods (including Medical Equipments) -010 038 -050 027(028) (000) (019)

PCE Nondurable Goods Less Energy -014 073 039 044(005) (000) (017)

PCE Food amp Beverage Purchased for Off-Premises Consumpt -024 066 071 055(004) (000) (024)

CPI-U Food at Home -027 063 082 052(005) (000) (028)

CPI-U Alcoholic Beverages -017 034 147 016(004) (000) (026)

PCE Pharmaceutical amp Other Medical Products -002 033 202 020(088) (000) (039)

PCE Other Nondurable Goods 008 025 000 042(046) (001) (018)

CPI-U Apparel 054 014 -069 022(000) (018) (030)

CPIU MicroPC - Gd

CPIU MicroPC - Sv

CPIU Components

CPIU MicroPC

Disaggregated PC Model

CPI and PCE weights

Dist of Price Changes (PCE)

lt02017Q12017Q22017Q32017Q42982879399018251530076497118373328794231576306846275112741969116890-22017Q12017Q22017Q32017Q4211846689120427351723027711342023221545531071181461218771897151376142-32017Q12017Q22017Q32017Q413958943933910467193842670834840815394970956904032747859413992923283-52017Q12017Q22017Q32017Q4176887169228583721572899097997604717537133523823844221799519998565525-102017Q12017Q22017Q32017Q482906102250864162821465544005778097459146483527973784429446756549655gt102017Q12017Q22017Q32017Q490482660159195003936531226468855499268986388255841612510045272509943

Percent of Expenditures

12

CBO

Servicesndash Prices are largely determined by domestic andor local factors

Household maintenance restaurants etcndash Cannot be inventoried

Goodsndash Lots of measurement issues and noise from one-off price shocks (Stock and

Watson 2018) Measurement issue very severe for apparel recreational goods financial

services etc One-off price shocks ldquocash for clunkersrdquo (2009) federal tobacco tax hike

(2009) ndash Tend to be more heavily influenced by long-run structural forces

Globalization Abdih et al (2016) and others ldquoThe Amazon effectrdquo Goolsbee and Klenow (2018) Increasing industrial concentration

Goods Versus Services Possible Explanations

13

CBO

Services Componentsndash Generally Phillips curve equations at the component level work relatively wellndash Special case PCE health care services (policy plays a large role)

CBOrsquos model incorporates CBOrsquos projection of Medicare reimbursement rate growth

Goods Componentsndash ldquoTop-down Approachrdquo CBO currently uses core PCE inflation (from the

aggregate Phillips curve) as an input in the equations for goods components Keep track of movements in relative prices Judgment in sector-specific trends Control for relative price of imports one-off price shocks etc

Forecasting Inflation at the Component Level

14

CBO

Modeling Inflation ExpectationsBackward-Looking Versus Anchored

15

CBO

Reduced-form

120587120587119905119905= 120630120630119860119860(119871119871)120587120587119905119905minus1 + (120783120783 minus 120630120630)120587120587lowast minus 120573120573 119880119880119905119905 minus 119880119880119905119905lowast + 120574120574119885119885119905119905 + 120598120598119905119905o 119860119860(119871119871)120587120587119905119905minus1 Use four lags of past inflationo 120587120587lowast Long-run inflationldquoanchorrdquoo 119880119880119905119905 minus 119880119880119905119905lowast The unemployment gap (CBOrsquos estimate)o 119885119885119905119905 Supply-side shocks including relative prices of imports and energy goodso Sample 1998Q1ndash2018Q3

Blanchard (2016) ldquoThe Phillips Curve Back to the rsquo60srdquo ndash Shows 120630120630 declined over time and is currently very small for headline CPI

But component-level analysis implies that the measure of inflation matters

This exercise Try ten different measures of aggregate inflation

Estimating the Aggregate Phillips Curve

16

CBO

Three measures of headline inflationndash Headline CPI-U (BLS) and Headline PCEPI (BEA) ndash Chained CPI-U (BLS)

Ten Measures of Inflation

17

CBO

Seven measures of core inflationndash Approach 1 Remove the most volatile price changes

XFE CPI-U (BLS) and XFE PCEPI (BEA) Median CPI-U and 16-Trimmed-Mean CPI-U (Federal Reserve Bank of

Cleveland) Rank price changes by size each month and trim the items with price

changes that are above or below a certain threshold ldquoMedianrdquo is just extreme trimming

Trimmed-Mean PCEPI (Federal Reserve Bank of Dallas) Trimming point chosen optimally every month

ndash Approach 2 Remove the most frequent price changes Sticky CPI-U and Sticky-XFE CPI (Federal Reserve Bank of Atlanta)

Price changes every 43 months or longer (Bils and Klenow 2004)

Ten Measures of Inflation (Continued)

18

CBO

Seven Measures of Core Inflation

19

CBO

Relative weight of lagged inflation and constantldquoanchorrdquondash Overall inflation 120572120572 asymp 02 consistent with Blanchard (2016) for headline CPI

Estimation Results I

This figure plots the sum of the estimated coefficients on lagged inflation terms using recursive samples that start in 1998Q1 and end in 2012Q1 2012Q2 hellip and 2018Q1 The Phillips curve equations are ldquounrestrictedrdquo as no assumption was imposed on the value of π before the estimation Instead the intercept of the equation which in theory equals απ was estimated and then the values of α and π were calculated by assuming the long-run restriction on the estimated coefficients

20

CBO

Relative weight of lagged inflation and constantldquoanchorrdquondash Overall inflation 120572120572 asymp 02 consistent with Blanchard (2016) for headline CPIndash Core inflation 120572120572 asymp 05 particularly for non-XFE measures

Estimation Results I (Continued)

This figure plots the sum of the estimated coefficients on lagged inflation terms using recursive samples that start in 1998Q1 and end in 2012Q1 2012Q2 hellip and 2018Q1 The Phillips curve equations are ldquounrestrictedrdquo as no assumption was imposed on the value of π before the estimation Instead the intercept of the equation which in theory equals απ was estimated and then the values of α and π were calculated by assuming the long-run restriction on the estimated coefficients

21

CBO

Further analysis using survey measures of inflation expectations suggests

Inflation expectations by consumers matter more for inflation dynamics than the expectations by professional forecasters for all ten measures of inflation

ndash Consumersrsquo expectations more closely resemble those of firms (Coibion and Gorodnichenko 2015)

ndash Transmission of professional forecastersrsquo views to consumers is weak in a low-inflation environment

ndash Coibion et al (2017) Similar finding for headline CPI

Long-run inflation expectations by consumers are ldquoshock-anchoredrdquo but not ldquolevel-anchoredrdquo (Ball and Mazumder 2011)

ndash Shock-anchoring Transitory shocks not passed to expectationsndash Level-anchoring Expectations tied to a particular level

Estimation Results I (Continued)

22

CBO

Comparing measures of core inflationndash The Phillips curve fits the non-XFE measures very well

Average adj 1198771198772 of non-XFE measures = 07 Ball and Mazumder (2014) Showed this for median CPI

ndash XFEs are ldquooutliersrdquo particularly XFE CPI-U (low 120572120572 and low 1198771198772) Average adj 1198771198772 of XFE measures = 025

Possible explanationndash Fewer goods prices in the non-XFE core measures

Goods price changes are more volatile Goods price changes occur more frequently

Estimation Results II

23

CBO

CPI Components Summary Statistics and Categorization

Mean Standard Deviation

Relative Importance

(2017)

Change in Relative

Importantce 2007-2017

XFE Sticky CPIProbability

(= Median CPI) (1998-2007)

(1) (2) (3) (4) (5) (6) (7)

Core (XFE) ServicesOwners Equivalent of Rent (OER) 27 11 232 298 Y Y 52Rent of Primary Residence 32 11 79 101 Y Y 5Medical Care Services 38 13 67 233 Y Y 2Education Services 49 15 30 058 Y Y 0Transportation Services 27 18 60 -105 Y Y 5

Core (XFE) GoodsApparel -03 25 31 -189 Y N 2New Vehicles 01 23 36 -142 Y N 3Used Cars and Trucks -03 8 21 020 Y N 0Medical Care Goods 29 16 18 059 Y Y 1

Food and EnergyFood away from Home 28 09 59 019 N Y 11Food at Home 21 27 77 -201 N N 6Energy 36 202 75 078 N N 1

CategorizationSummary Statistics

Major CPI Components

The categorization of components into sticky CPI is based on Bryan and Meyer (2010) ldquoAre Some Prices in the CPI More Forward Looking Than Others We Think Sordquo Economic Commentary Federal Reserve Bank of Cleveland httpswwwfrbatlantaorg-mediadocumentsresearchinflationprojectstickypricesticky-price-cpi-supplemental-readingpdf The probabilities of a componentrsquos being the median CPI are based on the ldquorevised methodologyrdquo that split the OER into four regional components For more detail see httpswwwclevelandfedorgenour-researchindicators-and-datamedian-cpirevised-methodologyaspx

CPIU MicroPC - Gd

CPIU MicroPC - Sv

CPIU Components

CPIU MicroPC

Disaggregated PC Model

CPI and PCE weights

Dist of Price Changes (PCE)

lt02017Q12017Q22017Q32017Q42982879399018251530076497118373328794231576306846275112741969116890-22017Q12017Q22017Q32017Q4211846689120427351723027711342023221545531071181461218771897151376142-32017Q12017Q22017Q32017Q413958943933910467193842670834840815394970956904032747859413992923283-52017Q12017Q22017Q32017Q4176887169228583721572899097997604717537133523823844221799519998565525-102017Q12017Q22017Q32017Q482906102250864162821465544005778097459146483527973784429446756549655gt102017Q12017Q22017Q32017Q490482660159195003936531226468855499268986388255841612510045272509943

Percent of Expenditures

24

CBO

The slope of the Phillips curve Flat but steeper for CPIs than PCEPIsndash 120573120573 = 005∿01 for PCEPIs but = 01∿02 for CPIsndash Why Shelter the most cyclically sensitive component has a much larger weight in CPI than in PCEPI

Estimation Results III

This figure plots the sum of the estimated coefficients on lagged inflation terms using recursive samples that start in 1998Q1 and end in 2012Q1 2012Q2 hellip and 2018Q1 The Phillips curve equations are ldquounrestrictedrdquo as no assumption was imposed on the value of π before the estimation Instead the intercept of the equation which in theory equals απ was estimated and then the values of α and π were calculated by assuming the long-run restriction on the estimated coefficients

25

CBO

The slope of the Phillips curve Flat but steeper for CPIs than PCEPIsndash 120573120573 = 005∿01 for PCEPIs but = 01∿02 for CPIsndash Why Shelter the most cyclically sensitive component has a much larger weight in CPI than in PCEPI

Estimation Results III (Continued)

This figure plots the sum of the estimated coefficients on lagged inflation terms using recursive samples that start in 1998Q1 and end in 2012Q1 2012Q2 hellip and 2018Q1 The Phillips curve equations are ldquounrestrictedrdquo as no assumption was imposed on the value of π before the estimation Instead an intercept of the equation which in theory equals απ was estimated and then the value of α and π were calculated by assuming the long-run restriction on the estimated coefficients

26

CBO

Reviewing the Findings

27

CBO

Phillips-curve analysis at the component level provides insight intondash Cyclical sensitivity of aggregate inflation

For most service components and food inflation process is pro-cyclical For most non-food good components inflation process is not pro-cyclical

Need better understanding and models for goods price inflationndash Difference in the behaviors of various inflation measures

CPI is more cyclically sensitive than PCEPI because shelter has larger share in CPI

Non-XFE measures of core inflation better capture movements in trend inflation because they contain fewer noisy goods components

The aggregate Phillips curve has shifted away from ldquoaccelerationistrdquo toward an ldquoanchoredrdquo form but the process appears incomplete

ndash Need better understanding of the formation process of inflation expectations particularly those of consumers and firms

Conclusions

28

CBO

Abdih Yasser Ravi Balakrishnan and Baoping Shang ldquoWhat Is Keeping US Core Inflation Low Insights From a Bottom-Up Approachrdquo International Monetary Fund 2016

Ball Laurence and Sandeep Mazumder ldquoInflation Dynamics and the Great Recessionrdquo Brookings Papers on Economic Activity (2011) 337ndash406

Blanchard Olivier ldquoThe Phillips Curve Back to the rsquo60s American Economic Review 1065 (2016) 31ndash34

Bils Mark and Peter J Klenow ldquoSome Evidence on the Importance of Sticky Pricesrdquo Journal of Political Economy 1125 (2004) 947ndash985

Coibion Olivier and Yuriy Gorodnichenko ldquoIs the Phillips Curve Alive and Well After All Inflation Expectations and the Missing Disinflationrdquo American Economic Journal Macroeconomics 71 (2015) 197ndash232

References

29

CBO

Coibion Olivier Yuriy Gorodnichenko and Rupal Kamdar ldquoThe Formation of Expectations Inflation and the Phillips Curverdquo No w23304 National Bureau of Economic Research 2017

Goolsbee Austan D and Peter J Klenow ldquoInternet Rising Prices Falling Measuring Inflation in a World of E-Commercerdquo AEA Papers and Proceedings Vol 108 2018

Stock J and Mark Watson ldquoSlack and Cyclically Sensitive Inflationrdquo ECB Forum on Central Banking Sintra Portugal 2018

Struyven Dann ldquoWhich Prices Still Respond to Slackrdquo Goldman Sachs Economics Research (October 31 2017)

References (Continued)

  • Inflation and the Phillips Curve
  • Inflation 1948ndash2018
  • Inflation Expectations 1948ndash2018
  • Unemployment 1948ndash2018
  • Structure of CBOrsquos Model for the Personal Consumption Expenditures (PCE) Price Index
  • Expectation-Augmented Phillips Curve
  • Slide Number 7
  • Phillips Curve Model at the Component Level
  • Shelter Inflation
  • Auto Inflation
  • Services Largely Pro-Cyclical
  • Goods Largely Not Pro-Cyclical Except Food
  • Goods Versus Services Possible Explanations
  • Forecasting Inflation at the Component Level
  • Slide Number 15
  • Estimating the Aggregate Phillips Curve
  • Ten Measures of Inflation
  • Ten Measures of Inflation (Continued)
  • Seven Measures of Core Inflation
  • Estimation Results I
  • Estimation Results I (Continued)
  • Estimation Results I (Continued)
  • Estimation Results II
  • CPI Components Summary Statistics and Categorization
  • Estimation Results III
  • Estimation Results III (Continued)
  • Slide Number 27
  • Conclusions
  • References
  • References (Continued)
Current vintage data
Dec-16 Jan-17 Feb-17 Mar-17 Apr-17 May-17 Jun-17 Jul-17 Aug-17 Sep-17 Oct-17 Nov-17 Dec-17
Rose at 0-2 rate 314 179 190 266 178 158 181 206 275 165 181 224 251
Rose at 2-3 rate 82 137 111 171 191 280 111 130 116 216 88 97 39
Rose at 3-5 rate 240 198 253 80 126 136 209 161 241 125 231 258 177
Rose at 5-10 rate 100 122 57 70 71 85 91 60 51 114 50 122 81
Rose faster than 10 rate 67 137 108 27 151 55 75 116 65 97 159 82 134
227 281 387 282 286 334 328 253 283 291 218 317
212 172 215455310712 218771897151
140 194 153949709569 74785941399
177 157 175371335238 221799519999
83 82 74591464835 84429446757
90 94 92689863883 125100452725
298 301 287942315763 275112741969
2017Q1 2017Q2 2017Q3 2017Q4
Fell 2983 3008 2879 2751
Rose at 0-2 rate 2118 1723 2155 2188
Rose at 2-3 rate 1396 1938 1539 748
Rose at 3-5 rate 1769 1573 1754 2218
Rose at 5-10 rate 829 821 746 844
Rose faster than 10 rate 905 937 927 1251
Major Sectors CPI PCEPI
Housing 426 183
Health Care 85 231
Food and Beverages 146 137
Transportation 153 90
Recreation 57 89
Education and Communication 70 46
Apparel 30 29
Financial Services 02 47
Other 30 147
Total 100 100
Data December 2016
Naiumlve Phillips-Curve-Style Models (Sample 1998-2017)
8 9 10 11
Variables Constant Lagged Inflation Unemployment Gap Adjusted R2 Order of AR Order of Lagged Rucgap
Owners Equivalent of Rent 118 062 -022 078 1 1
(48) (79) -(40)
Rent of Primary Residence 141 060 -018 084 1 4
(48) (74) -(33)
Medical Care Services 131 067 -007 032 2
(27) (58) -(09)
Education Services 023 095 -009 078 4 2
(07) (149) -(16)
Transportation Services 26 01 -00 018 1 3
(59) (05) -(02)
Apparel -060 027 043 016 4 0
-(19) (15) (23)
New Vehicles -046 003 065 018 1 0
-(17) (03) (39)
Used Cars and Trucks -001 031 092 028 2 4
-(00) (35) (19)
Medical Care Goods 23 02 -01 023 3
(51) (14) -(08)
Food away from Home 116 060 -008 050 1 2
(40) (62) -(15)
Food at Home 105 063 -009 059 1
(37) (86) -(07)
Energy 983 -022 -061 048 1
(48) -(22) -(06)
Unemployment Gap Lagged Inflation Constant Adjusted R2 Obs Durbin-Watson Statistic Order of Lagged Inflation Order of Lagged Unemployment Gap
Services
Owners Equivalent of Rent -021 062 113 078 83 171 1 1
000 000 024
Rent of Primary Residence -015 067 116 084 83 217 1 5
000 000 026
Food away from Home -008 061 108 057 83 251 2 2
007 000 025
Medical Care Services -005 070 115 034 83 201 2 0
051 000 045
Education Services -007 093 030 081 83 202 4 2
016 000 029
Transportation Services -002 -011 320 016 83 198 2 3
087 027 036
Goods
Apparel 050 010 -054 008 83 192 4 0
001 039 032
New Vehicles 038 002 -034 034 83 186 1 0
001 084 023
Used Cars and Trucks 038 018 -019 034 83 174 2 4
047 013 082
Food at Home -005 065 103 057 83 237 1 0
072 000 027
Medical Care Goods -005 046 169 056 83 196 3 0
053 000 028
Controlling Inflnm + Inflne
Unemployment Gap Lagged Inflation Constant Adjusted R2 Observations Durbin-Watson Statistic Order of Lagged Inflation Order of Lagged Unemployment Gap
Owners Equivalent of Rent (OER) -0212 0633 1120 077 80 179 1 1
(0058) (0082) (0260)
Rent of Primary Residence -0171 0604 1395 084 80 201 1 5
(0056) (0085) (0308)
Medical Care Services -0070 0693 1191 031 80 205 2 0
(0083) (0123) (0514)
Education Services -0087 0947 0296 078 80 204 4 2
(0055) (0067) (0354)
Transportation Services -0035 0154 2284 019 80 203 2 3
(0130) (0160) (0485)
Apparel 0416 0305 -0594 015 80 187 4 0
(0187) (0178) (0327)
New Vehicles 0655 0021 -0494 017 80 200 1 0
(0169) (0112) (0287)
Used Cars and Trucks 0410 0215 -0860 038 80 185 2 4
(0535) (0114) (0902)
Medical Care Goods -0082 0202 2251 022 80 192 3 0
(0105) (0141) (0458)
Food away from Home -0086 0613 1159 059 80 236 2 2
(0132) (0074) (0302)
Food at Home -0065 0751 0781 053 80 216 1 0
(0049) (0116) (0340)
Energy -0735 0068 2120 096 80 134 2 0
(0311) (0035) (0651)
Controlling Inflnm
Unemployment Gap Lagged Inflation Constant Adjusted R2 Observations Durbin-Watson Statistic Order of Lagged Inflation Order of Lagged Unemployment Gap
Core (XFE) Services
Owners Equivalent of Rent (OER) -0212 0632 1129 078 80 180 1 1
(0058) (0081) (0257)
Rent of Primary Residence -0171 0605 1393 084 80 201 1 5
(0055) (0084) (0302)
Medical Care Services -0068 0696 1189 032 80 205 2 0
(0082) (0122) (0511)
Education Services -0087 0943 0287 078 80 201 4 2
(0055) (0067) (0353)
Transportation Services -0030 0076 2602 017 80 202 2 3
(0131) (0152) (0440)
Apparel 0426 0292 -0544 016 80 189 4 0
(0186) (0176) (0315)
New Vehicles 0658 0023 -0436 017 80 196 1 0
(0168) (0112) (0272)
Used Cars and Trucks 0399 0190 -0322 036 80 171 2 4
(0543) (0115) (0861)
Medical Care Goods -0080 0203 2289 022 80 193 3 0
(0104) (0140) (0453)
Food away from Home -0090 0628 1038 059 80 237 2 2
(0132) (0073) (0282)
Food at Home -0064 0754 0741 053 80 216 1 0
(0049) (0116) (0338)
Energy -0678 -0305 10270 049 80 198 2 0
(1085) (0114) (2053)
Major CPI Components Summary Statistics Categorization
Mean Standard Deviation Relative Importance (2017) Change in Relative Importantce 2007-2017 XFE Sticky CPI Probability (= Median CPI) (1998-2007)
1 2 3 4 5 6 7
Core (XFE) Services
Owners Equivalent of Rent (OER) 27 11 232 298 Y Y 52
Rent of Primary Residence 32 11 79 101 Y Y 5
Medical Care Services 38 13 67 233 Y Y 2
Education Services 49 15 30 058 Y Y 0
Transportation Services 27 18 60 -105 Y Y 5
Core (XFE) Goods
Apparel -03 25 31 -189 Y N 2
New Vehicles 01 23 36 -142 Y N 3
Used Cars and Trucks -03 8 21 020 Y N 0
Medical Care Goods 29 16 18 059 Y Y 1
Food and Energy
Food away from Home 28 09 59 019 N Y 11
Food at Home 21 27 77 -201 N N 6
Energy 36 202 75 078 N N 1
Unemployment Gap Lagged Inflation Constant Adjusted R2 Observations Durbin-Watson Statistic
PCE Services Less Energy -014 032 191 046 83 185
(000) (001) (035)
PCE Housing Services -023 058 129 080 83 208
(000) (000) (024)
CPI-U Owners Equivalent of Rent -021 062 113 078 83 171
(000) (000) (024)
CPI-U Rent of Primary Residence -015 067 116 084 83 217
(000) (000) (026)
PCE Health Care Services -006 062 092 042 83 207
(038) (000) (026)
PCE Services Less Energy Rent of Shelter amp Health care -004 035 172 038 83 226
(050) (000) (028)
CPI-U Services Less Energy Services amp Rent of Shelter -015 040 188 034 83 218
(001) (000) (040)
CPI-U Medical Care Services -005 070 115 034 83 201
(051) (000) (045)
CPI-U Food away from Home -009 062 105 057 83 264
(005) (000) (025)
CPI-U Education Services -007 093 030 081 83 202
(016) (000) (029)
CPI-U Transportation Services -002 -011 320 016 83 198
(087) (027) (036)
Unemployment Gap Lagged Inflation Constant Adjusted R2 Observations Durbin-Watson Statistic
PCE Durable Goods 008 028 -154 027 83 183
(031) (001) (024)
PCE Motor Vehicles and Parts 031 030 -021 043 83 178
(005) (000) (025)
PCE Video Audio Photo amp 016 060 -395 044 83 222
Information Processing Equipment amp Media (034) (000) (087)
PCE Other Durable Goods (including Medical Equipments) -010 038 -050 027 83 188
(028) (000) (019)
PCE Nondurable Goods Less Energy -014 073 039 044 83 203
(005) (000) (017)
PCE Food amp Beverage Purchased for Off-Premises Consumption -024 066 071 055 83 226
(004) (000) (024)
CPI-U Food at Home -027 063 082 052 83 216
(005) (000) (028)
CPI-U Alcoholic Beverages -017 034 147 016 83 209
(004) (000) (026)
PCE Pharmaceutical amp Other Medical Products -002 033 202 020 83 173
(088) (000) (039)
PCE Other Nondurable Goods 008 025 000 042 83 179
(046) (001) (018)
CPI-U Apparel 054 014 -069 022 83 191
(000) (018) (030)
Current vintage data
Dec-16 Jan-17 Feb-17 Mar-17 Apr-17 May-17 Jun-17 Jul-17 Aug-17 Sep-17 Oct-17 Nov-17 Dec-17
Rose at 0-2 rate 314 179 190 266 178 158 181 206 275 165 181 224 251
Rose at 2-3 rate 82 137 111 171 191 280 111 130 116 216 88 97 39
Rose at 3-5 rate 240 198 253 80 126 136 209 161 241 125 231 258 177
Rose at 5-10 rate 100 122 57 70 71 85 91 60 51 114 50 122 81
Rose faster than 10 rate 67 137 108 27 151 55 75 116 65 97 159 82 134
227 281 387 282 286 334 328 253 283 291 218 317
212 172 215455310712 218771897151
140 194 153949709569 74785941399
177 157 175371335238 221799519999
83 82 74591464835 84429446757
90 94 92689863883 125100452725
298 301 287942315763 275112741969
2017Q1 2017Q2 2017Q3 2017Q4
Fell 2983 3008 2879 2751
Rose at 0-2 rate 2118 1723 2155 2188
Rose at 2-3 rate 1396 1938 1539 748
Rose at 3-5 rate 1769 1573 1754 2218
Rose at 5-10 rate 829 821 746 844
Rose faster than 10 rate 905 937 927 1251
Major Sectors CPI PCEPI
Housing 426 183
Health Care 85 231
Food and Beverages 146 137
Transportation 153 90
Recreation 57 89
Education and Communication 70 46
Apparel 30 29
Financial Services 02 47
Other 30 147
Total 100 100
Data December 2016
Naiumlve Phillips-Curve-Style Models (Sample 1998-2017)
8 9 10 11
Variables Constant Lagged Inflation Unemployment Gap Adjusted R2 Order of AR Order of Lagged Rucgap
Owners Equivalent of Rent 118 062 -022 078 1 1
(48) (79) -(40)
Rent of Primary Residence 141 060 -018 084 1 4
(48) (74) -(33)
Medical Care Services 131 067 -007 032 2
(27) (58) -(09)
Education Services 023 095 -009 078 4 2
(07) (149) -(16)
Transportation Services 26 01 -00 018 1 3
(59) (05) -(02)
Apparel -060 027 043 016 4 0
-(19) (15) (23)
New Vehicles -046 003 065 018 1 0
-(17) (03) (39)
Used Cars and Trucks -001 031 092 028 2 4
-(00) (35) (19)
Medical Care Goods 23 02 -01 023 3
(51) (14) -(08)
Food away from Home 116 060 -008 050 1 2
(40) (62) -(15)
Food at Home 105 063 -009 059 1
(37) (86) -(07)
Energy 983 -022 -061 048 1
(48) -(22) -(06)
Unemployment Gap Lagged Inflation Constant Adjusted R2 Obs Durbin-Watson Statistic Order of Lagged Inflation Order of Lagged Unemployment Gap
Services
Owners Equivalent of Rent -021 062 113 078 83 171 1 1
000 000 024
Rent of Primary Residence -015 067 116 084 83 217 1 5
000 000 026
Food away from Home -008 061 108 057 83 251 2 2
007 000 025
Medical Care Services -005 070 115 034 83 201 2 0
051 000 045
Education Services -007 093 030 081 83 202 4 2
016 000 029
Transportation Services -002 -011 320 016 83 198 2 3
087 027 036
Goods
Apparel 050 010 -054 008 83 192 4 0
001 039 032
New Vehicles 038 002 -034 034 83 186 1 0
001 084 023
Used Cars and Trucks 038 018 -019 034 83 174 2 4
047 013 082
Food at Home -005 065 103 057 83 237 1 0
072 000 027
Medical Care Goods -005 046 169 056 83 196 3 0
053 000 028
Controlling Inflnm + Inflne
Unemployment Gap Lagged Inflation Constant Adjusted R2 Observations Durbin-Watson Statistic Order of Lagged Inflation Order of Lagged Unemployment Gap
Owners Equivalent of Rent (OER) -0212 0633 1120 077 80 179 1 1
(0058) (0082) (0260)
Rent of Primary Residence -0171 0604 1395 084 80 201 1 5
(0056) (0085) (0308)
Medical Care Services -0070 0693 1191 031 80 205 2 0
(0083) (0123) (0514)
Education Services -0087 0947 0296 078 80 204 4 2
(0055) (0067) (0354)
Transportation Services -0035 0154 2284 019 80 203 2 3
(0130) (0160) (0485)
Apparel 0416 0305 -0594 015 80 187 4 0
(0187) (0178) (0327)
New Vehicles 0655 0021 -0494 017 80 200 1 0
(0169) (0112) (0287)
Used Cars and Trucks 0410 0215 -0860 038 80 185 2 4
(0535) (0114) (0902)
Medical Care Goods -0082 0202 2251 022 80 192 3 0
(0105) (0141) (0458)
Food away from Home -0086 0613 1159 059 80 236 2 2
(0132) (0074) (0302)
Food at Home -0065 0751 0781 053 80 216 1 0
(0049) (0116) (0340)
Energy -0735 0068 2120 096 80 134 2 0
(0311) (0035) (0651)
Controlling Inflnm
Unemployment Gap Lagged Inflation Constant Adjusted R2 Observations Durbin-Watson Statistic Order of Lagged Inflation Order of Lagged Unemployment Gap
Core (XFE) Services
Owners Equivalent of Rent (OER) -0212 0632 1129 078 80 180 1 1
(0058) (0081) (0257)
Rent of Primary Residence -0171 0605 1393 084 80 201 1 5
(0055) (0084) (0302)
Medical Care Services -0068 0696 1189 032 80 205 2 0
(0082) (0122) (0511)
Education Services -0087 0943 0287 078 80 201 4 2
(0055) (0067) (0353)
Transportation Services -0030 0076 2602 017 80 202 2 3
(0131) (0152) (0440)
Apparel 0426 0292 -0544 016 80 189 4 0
(0186) (0176) (0315)
New Vehicles 0658 0023 -0436 017 80 196 1 0
(0168) (0112) (0272)
Used Cars and Trucks 0399 0190 -0322 036 80 171 2 4
(0543) (0115) (0861)
Medical Care Goods -0080 0203 2289 022 80 193 3 0
(0104) (0140) (0453)
Food away from Home -0090 0628 1038 059 80 237 2 2
(0132) (0073) (0282)
Food at Home -0064 0754 0741 053 80 216 1 0
(0049) (0116) (0338)
Energy -0678 -0305 10270 049 80 198 2 0
(1085) (0114) (2053)
Major CPI Components Summary Statistics Categorization
Mean Standard Deviation Relative Importance (2017Q4) Change in Relative Importantce CPI Excluding Food and Energy Sticky CPI Probability (= Median CPI) (1998-2007)
1 2 3 4 5 6 7
Core (XFE) Services
Owners Equivalent of Rent (OER) 27 11 232 298 Y Y 52
Rent of Primary Residence 32 11 79 101 Y Y 5
Medical Care Services 38 13 67 233 Y Y 2
Education Services 49 15 30 058 Y Y 0
Transportation Services 27 18 60 -105 Y Y 5
Core (XFE) Goods
Apparel -03 25 31 -189 Y N 2
New Vehicles 01 23 36 -142 Y N 3
Used Cars and Trucks -03 8 21 020 Y N 0
Medical Care Goods 29 16 18 059 Y Y 1
Food and Energy
Food away from Home 28 09 59 019 N Y 11
Food at Home 21 27 77 -201 N N 6
Energy 36 202 75 078 N N 1
Unemployment Gap Lagged Inflation Constant Adjusted R2 Observations Durbin-Watson Statistic
PCE Services Less Energy -014 032 191 046 83 185
(000) (001) (035)
PCE Housing Services -023 058 129 080 83 208
(000) (000) (024)
CPI-U Owners Equivalent of Rent -021 062 113 078 83 171
(000) (000) (024)
CPI-U Rent of Primary Residence -015 067 116 084 83 217
(000) (000) (026)
PCE Health Care Services -006 062 092 042 83 207
(038) (000) (026)
PCE Services Less Energy Rent of Shelter amp Health care -004 035 172 038 83 226
(050) (000) (028)
CPI-U Services Less Energy Services amp Rent of Shelter -015 040 188 034 83 218
(001) (000) (040)
CPI-U Medical Care Services -005 070 115 034 83 201
(051) (000) (045)
CPI-U Food away from Home -009 062 105 057 83 264
(005) (000) (025)
CPI-U Education Services -007 093 030 081 83 202
(016) (000) (029)
CPI-U Transportation Services -002 -011 320 016 83 198
(087) (027) (036)
Unemployment Gap Lagged Inflation Constant Adjusted R2 Observations Durbin-Watson Statistic
PCE Durable Goods 008 028 -154 027 83 183
(031) (001) (024)
PCE Motor Vehicles and Parts 031 030 -021 043 83 178
(005) (000) (025)
PCE Video Audio Photo amp 016 060 -395 044 83 222
Information Processing Equipment amp Media (034) (000) (087)
PCE Other Durable Goods (including Medical Equipments) -010 038 -050 027 83 188
(028) (000) (019)
PCE Nondurable Goods Less Energy -014 073 039 044 83 203
(005) (000) (017)
PCE Food amp Beverage Purchased for Off-Premises Consumption -024 066 071 055 83 226
(004) (000) (024)
CPI-U Food at Home -027 063 082 052 83 216
(005) (000) (028)
CPI-U Alcoholic Beverages -017 034 147 016 83 209
(004) (000) (026)
PCE Pharmaceutical amp Other Medical Products -002 033 202 020 83 173
(088) (000) (039)
PCE Other Nondurable Goods 008 025 000 042 83 179
(046) (001) (018)
CPI-U Apparel 054 014 -069 022 83 191
(000) (018) (030)
Current vintage data
Dec-16 Jan-17 Feb-17 Mar-17 Apr-17 May-17 Jun-17 Jul-17 Aug-17 Sep-17 Oct-17 Nov-17 Dec-17
Rose at 0-2 rate 314 179 190 266 178 158 181 206 275 165 181 224 251
Rose at 2-3 rate 82 137 111 171 191 280 111 130 116 216 88 97 39
Rose at 3-5 rate 240 198 253 80 126 136 209 161 241 125 231 258 177
Rose at 5-10 rate 100 122 57 70 71 85 91 60 51 114 50 122 81
Rose faster than 10 rate 67 137 108 27 151 55 75 116 65 97 159 82 134
227 281 387 282 286 334 328 253 283 291 218 317
212 172 215455310712 218771897151
140 194 153949709569 74785941399
177 157 175371335238 221799519999
83 82 74591464835 84429446757
90 94 92689863883 125100452725
298 301 287942315763 275112741969
2017Q1 2017Q2 2017Q3 2017Q4
Fell 2983 3008 2879 2751
Rose at 0-2 rate 2118 1723 2155 2188
Rose at 2-3 rate 1396 1938 1539 748
Rose at 3-5 rate 1769 1573 1754 2218
Rose at 5-10 rate 829 821 746 844
Rose faster than 10 rate 905 937 927 1251
Major Sectors CPI PCEPI
Housing 426 183
Health Care 85 231
Food and Beverages 146 137
Transportation 153 90
Recreation 57 89
Education and Communication 70 46
Apparel 30 29
Financial Services 02 47
Other 30 147
Total 100 100
Data December 2016
Naiumlve Phillips-Curve-Style Models (Sample 1998-2017)
8 9 10 11
Variables Constant Lagged Inflation Unemployment Gap Adjusted R2 Order of AR Order of Lagged Rucgap
Owners Equivalent of Rent 118 062 -022 078 1 1
(48) (79) -(40)
Rent of Primary Residence 141 060 -018 084 1 4
(48) (74) -(33)
Medical Care Services 131 067 -007 032 2
(27) (58) -(09)
Education Services 023 095 -009 078 4 2
(07) (149) -(16)
Transportation Services 26 01 -00 018 1 3
(59) (05) -(02)
Apparel -060 027 043 016 4 0
-(19) (15) (23)
New Vehicles -046 003 065 018 1 0
-(17) (03) (39)
Used Cars and Trucks -001 031 092 028 2 4
-(00) (35) (19)
Medical Care Goods 23 02 -01 023 3
(51) (14) -(08)
Food away from Home 116 060 -008 050 1 2
(40) (62) -(15)
Food at Home 105 063 -009 059 1
(37) (86) -(07)
Energy 983 -022 -061 048 1
(48) -(22) -(06)
Unemployment Gap Lagged Inflation Constant Adjusted R2 Obs Durbin-Watson Statistic Order of Lagged Inflation Order of Lagged Unemployment Gap
Services
Owners Equivalent of Rent -021 062 113 078 83 171 1 1
000 000 024
Rent of Primary Residence -015 067 116 084 83 217 1 5
000 000 026
Food away from Home -008 061 108 057 83 251 2 2
007 000 025
Medical Care Services -005 070 115 034 83 201 2 0
051 000 045
Education Services -007 093 030 081 83 202 4 2
016 000 029
Transportation Services -002 -011 320 016 83 198 2 3
087 027 036
Goods
Apparel 050 010 -054 008 83 192 4 0
001 039 032
New Vehicles 038 002 -034 034 83 186 1 0
001 084 023
Used Cars and Trucks 038 018 -019 034 83 174 2 4
047 013 082
Food at Home -005 065 103 057 83 237 1 0
072 000 027
Medical Care Goods -005 046 169 056 83 196 3 0
053 000 028
Controlling Inflnm + Inflne
Unemployment Gap Lagged Inflation Constant Adjusted R2 Observations Durbin-Watson Statistic Order of Lagged Inflation Order of Lagged Unemployment Gap
Owners Equivalent of Rent (OER) -0212 0633 1120 077 80 179 1 1
(0058) (0082) (0260)
Rent of Primary Residence -0171 0604 1395 084 80 201 1 5
(0056) (0085) (0308)
Medical Care Services -0070 0693 1191 031 80 205 2 0
(0083) (0123) (0514)
Education Services -0087 0947 0296 078 80 204 4 2
(0055) (0067) (0354)
Transportation Services -0035 0154 2284 019 80 203 2 3
(0130) (0160) (0485)
Apparel 0416 0305 -0594 015 80 187 4 0
(0187) (0178) (0327)
New Vehicles 0655 0021 -0494 017 80 200 1 0
(0169) (0112) (0287)
Used Cars and Trucks 0410 0215 -0860 038 80 185 2 4
(0535) (0114) (0902)
Medical Care Goods -0082 0202 2251 022 80 192 3 0
(0105) (0141) (0458)
Food away from Home -0086 0613 1159 059 80 236 2 2
(0132) (0074) (0302)
Food at Home -0065 0751 0781 053 80 216 1 0
(0049) (0116) (0340)
Energy -0735 0068 2120 096 80 134 2 0
(0311) (0035) (0651)
Controlling Inflnm
Unemployment Gap Lagged Inflation Constant Adjusted R2 Observations Durbin-Watson Statistic Order of Lagged Inflation Order of Lagged Unemployment Gap
Core (XFE) Services
Owners Equivalent of Rent (OER) -0212 0632 1129 078 80 180 1 1
(0058) (0081) (0257)
Rent of Primary Residence -0171 0605 1393 084 80 201 1 5
(0055) (0084) (0302)
Medical Care Services -0068 0696 1189 032 80 205 2 0
(0082) (0122) (0511)
Education Services -0087 0943 0287 078 80 201 4 2
(0055) (0067) (0353)
Transportation Services -0030 0076 2602 017 80 202 2 3
(0131) (0152) (0440)
Apparel 0426 0292 -0544 016 80 189 4 0
(0186) (0176) (0315)
New Vehicles 0658 0023 -0436 017 80 196 1 0
(0168) (0112) (0272)
Used Cars and Trucks 0399 0190 -0322 036 80 171 2 4
(0543) (0115) (0861)
Medical Care Goods -0080 0203 2289 022 80 193 3 0
(0104) (0140) (0453)
Food away from Home -0090 0628 1038 059 80 237 2 2
(0132) (0073) (0282)
Food at Home -0064 0754 0741 053 80 216 1 0
(0049) (0116) (0338)
Energy -0678 -0305 10270 049 80 198 2 0
(1085) (0114) (2053)
Major CPI Components Summary Statistics Categorization
Mean Standard Deviation Relative Importance (2017Q4) Change in Relative Importantce CPI Excluding Food and Energy Sticky CPI Probability (= Median CPI) (1998-2007)
1 2 3 4 5 6 7
Core (XFE) Services
Owners Equivalent of Rent (OER) 27 11 232 298 Y Y 52
Rent of Primary Residence 32 11 79 101 Y Y 5
Medical Care Services 38 13 67 233 Y Y 2
Education Services 49 15 30 058 Y Y 0
Transportation Services 27 18 60 -105 Y Y 5
Core (XFE) Goods
Apparel -03 25 31 -189 Y N 2
New Vehicles 01 23 36 -142 Y N 3
Used Cars and Trucks -03 8 21 020 Y N 0
Medical Care Goods 29 16 18 059 Y Y 1
Food and Energy
Food away from Home 28 09 59 019 N Y 11
Food at Home 21 27 77 -201 N N 6
Energy 36 202 75 078 N N 1
Unemployment Gap Lagged Inflation Constant Adjusted R2 Observations Durbin-Watson Statistic
PCE Services Less Energy -014 032 191 046 83 185
(000) (001) (035)
PCE Housing Services -023 058 129 080 83 208
(000) (000) (024)
CPI-U Owners Equivalent of Rent -021 062 113 078 83 171
(000) (000) (024)
CPI-U Rent of Primary Residence -015 067 116 084 83 217
(000) (000) (026)
PCE Health Care Services -006 062 092 042 83 207
(038) (000) (026)
PCE Services Less Energy Rent of Shelter amp Health care -004 035 172 038 83 226
(050) (000) (028)
CPI-U Services Less Energy Services amp Rent of Shelter -015 040 188 034 83 218
(001) (000) (040)
CPI-U Medical Care Services -005 070 115 034 83 201
(051) (000) (045)
CPI-U Food away from Home -009 062 105 057 83 264
(005) (000) (025)
CPI-U Education Services -007 093 030 081 83 202
(016) (000) (029)
CPI-U Transportation Services -002 -011 320 016 83 198
(087) (027) (036)
Unemployment Gap Lagged Inflation Constant Adjusted R2 Observations Durbin-Watson Statistic
PCE Durable Goods 008 028 -154 027 83 183
(031) (001) (024)
PCE Motor Vehicles and Parts 031 030 -021 043 83 178
(005) (000) (025)
PCE Video Audio Photo amp 016 060 -395 044 83 222
Information Processing Equipment amp Media (034) (000) (087)
PCE Other Durable Goods (including Medical Equipments) -010 038 -050 027 83 188
(028) (000) (019)
PCE Nondurable Goods Less Energy -014 073 039 044 83 203
(005) (000) (017)
PCE Food amp Beverage Purchased for Off-Premises Consumption -024 066 071 055 83 226
(004) (000) (024)
CPI-U Food at Home -027 063 082 052 83 216
(005) (000) (028)
CPI-U Alcoholic Beverages -017 034 147 016 83 209
(004) (000) (026)
PCE Pharmaceutical amp Other Medical Products -002 033 202 020 83 173
(088) (000) (039)
PCE Other Nondurable Goods 008 025 000 042 83 179
(046) (001) (018)
CPI-U Apparel 054 014 -069 022 83 191
(000) (018) (030)
Page 4: Inflation and the Phillips Curve · Phillips curve is so flat Method: Estimating Phillips curve equations at the component level – Measure of slack: The unemployment gap (CBO’s

3

CBO

Unemployment 1948ndash2018

4

CBO

This flow chart shows the structure of CBOrsquos inflation model for the PCEPI as well as the spending shares for its components Those components include PCNFOOD Food amp Beverage Purchases for Off-Premises Consumption PCNENERGY Gasoline amp Other Energy Goods PCSENERGY Electricity and Gas PCDELEC Video Audio Photo amp Info Processing Equipment amp Media PCDMVAP Motor Vehicles amp Parts PCDMED Therapeutic Appliances amp Equipment PCDOTH Other Durable Goods (CBOrsquos calculation) PCNMED Pharmaceutical amp Other Medical Products PCNOTH Other Nondurable Goods (CBOrsquos calculation) PCSHOUS Housing PCSMED Health Care Services and PCSOTH Other Services (CBOrsquos calculation)

Structure of CBOrsquos Model for the Personal Consumption Expenditures (PCE) Price Index

5

CBO

120587120587119905119905= 119864119864119905119905120587120587119905119905+1 minus 120631120631 119880119880119905119905 minus 119880119880lowast + 120574120574119885119885119905119905 + 120598120598119905119905

Determinants of inflationndash 119864119864119905119905120587120587119905119905+1 Inflation expectationsndash 120573120573 119880119880119905119905 minus 119880119880lowast Unemployment gap or other measures of slack in the economyndash 120574120574119885119885119905119905 Supply-side shocks (for example relative price of imports energy etc)

Issue 1 Cyclical sensitivity of inflationndash For the price index of personal consumption expenditures (PCEPI) excluding food

and energy (ldquoXFErdquo or ldquocore-XFErdquo) 120573120573 has declined from 03~04 in the 1970s to 005~01 in the most recent decades

ndash Does inflation still respond to slack

Issue 2 The form of inflation expectationsndash ldquoAccelerationistrdquo 119864119864119905119905120587120587119905119905+1= 119860119860 119871119871 120587120587119905119905minus1 (distributed lags of inflation)ndash ldquoAnchoredrdquo 119864119864119905119905120587120587119905119905+1= 120587120587lowast (constant)ndash Combined 119864119864119905119905120587120587119905119905+1=120630120630119860119860(119871119871)120587120587119905119905minus1 + (120783120783 minus 120630120630)120587120587lowast

Expectation-Augmented Phillips Curve

6

CBO

Cyclical Sensitivity of InflationGoods Versus Services

7

CBO

Goal Understanding why the aggregate Phillips curve is so flat

Method Estimating Phillips curve equations at the component levelndash Measure of slack The unemployment gap (CBOrsquos estimate)ndash Sample 1998Q1ndash2018Q3 (stable inflation expectations)ndash Control for Relative price of imports and energy goods outliers (for example ldquocash

for clunkersrdquo)ndash Similar to Stock and Watson (2018) Struyven (2017)

Main Finding Divergence between goods and services in terms of cyclical sensitivity

ndash Services Remained largely pro-cyclicalmdashfor example shelterndash Goods Not pro-cyclical in the past two decades

Dampening the slope of the aggregate Phillips curve Exception Food prices

Phillips Curve Model at the Component Level

8

CBO

Shelter Inflation

9

CBO

Auto Inflation

10

CBO

Services Largely Pro-Cyclical

Unemployment Gap

Lagged Inflation Constant Adjusted R2

PCE Services Less Energy -014 032 191 046(000) (001) (035)

PCE Housing Services -023 058 129 080(000) (000) (024)

CPI-U Owners Equivalent of Rent -021 062 113 078(000) (000) (024)

CPI-U Rent of Primary Residence -015 067 116 084(000) (000) (026)

PCE Health Care Services -006 062 092 042(038) (000) (026)

PCE Services Less Energy Rent of Shelter amp Health care -004 035 172 038(050) (000) (028)

CPI-U Services Less Energy Services amp Rent of Shelter -015 040 188 034(001) (000) (040)

CPI-U Medical Care Services -005 070 115 034(051) (000) (045)

CPI-U Food away from Home -009 062 105 057(005) (000) (025)

CPI-U Education Services -007 093 030 081(016) (000) (029)

CPI-U Transportation Services -002 -011 320 016(087) (027) (036)

CPIU MicroPC - Gd

CPIU MicroPC - Sv

CPIU Components

CPIU MicroPC

Disaggregated PC Model

CPI and PCE weights

Dist of Price Changes (PCE)

lt02017Q12017Q22017Q32017Q42982879399018251530076497118373328794231576306846275112741969116890-22017Q12017Q22017Q32017Q4211846689120427351723027711342023221545531071181461218771897151376142-32017Q12017Q22017Q32017Q413958943933910467193842670834840815394970956904032747859413992923283-52017Q12017Q22017Q32017Q4176887169228583721572899097997604717537133523823844221799519998565525-102017Q12017Q22017Q32017Q482906102250864162821465544005778097459146483527973784429446756549655gt102017Q12017Q22017Q32017Q490482660159195003936531226468855499268986388255841612510045272509943

Percent of Expenditures

11

CBO

Goods Largely Not Pro-Cyclical Except Food

Unemployment Gap

Lagged Inflation Constant Adjusted R2

PCE Durable Goods 008 028 -154 027(031) (001) (024)

PCE Motor Vehicles and Parts 031 030 -021 043(005) (000) (025)

PCE Video Audio Photo amp 016 060 -395 044 Information Processing Equipment amp Media (034) (000) (087)

PCE Other Durable Goods (including Medical Equipments) -010 038 -050 027(028) (000) (019)

PCE Nondurable Goods Less Energy -014 073 039 044(005) (000) (017)

PCE Food amp Beverage Purchased for Off-Premises Consumpt -024 066 071 055(004) (000) (024)

CPI-U Food at Home -027 063 082 052(005) (000) (028)

CPI-U Alcoholic Beverages -017 034 147 016(004) (000) (026)

PCE Pharmaceutical amp Other Medical Products -002 033 202 020(088) (000) (039)

PCE Other Nondurable Goods 008 025 000 042(046) (001) (018)

CPI-U Apparel 054 014 -069 022(000) (018) (030)

CPIU MicroPC - Gd

CPIU MicroPC - Sv

CPIU Components

CPIU MicroPC

Disaggregated PC Model

CPI and PCE weights

Dist of Price Changes (PCE)

lt02017Q12017Q22017Q32017Q42982879399018251530076497118373328794231576306846275112741969116890-22017Q12017Q22017Q32017Q4211846689120427351723027711342023221545531071181461218771897151376142-32017Q12017Q22017Q32017Q413958943933910467193842670834840815394970956904032747859413992923283-52017Q12017Q22017Q32017Q4176887169228583721572899097997604717537133523823844221799519998565525-102017Q12017Q22017Q32017Q482906102250864162821465544005778097459146483527973784429446756549655gt102017Q12017Q22017Q32017Q490482660159195003936531226468855499268986388255841612510045272509943

Percent of Expenditures

12

CBO

Servicesndash Prices are largely determined by domestic andor local factors

Household maintenance restaurants etcndash Cannot be inventoried

Goodsndash Lots of measurement issues and noise from one-off price shocks (Stock and

Watson 2018) Measurement issue very severe for apparel recreational goods financial

services etc One-off price shocks ldquocash for clunkersrdquo (2009) federal tobacco tax hike

(2009) ndash Tend to be more heavily influenced by long-run structural forces

Globalization Abdih et al (2016) and others ldquoThe Amazon effectrdquo Goolsbee and Klenow (2018) Increasing industrial concentration

Goods Versus Services Possible Explanations

13

CBO

Services Componentsndash Generally Phillips curve equations at the component level work relatively wellndash Special case PCE health care services (policy plays a large role)

CBOrsquos model incorporates CBOrsquos projection of Medicare reimbursement rate growth

Goods Componentsndash ldquoTop-down Approachrdquo CBO currently uses core PCE inflation (from the

aggregate Phillips curve) as an input in the equations for goods components Keep track of movements in relative prices Judgment in sector-specific trends Control for relative price of imports one-off price shocks etc

Forecasting Inflation at the Component Level

14

CBO

Modeling Inflation ExpectationsBackward-Looking Versus Anchored

15

CBO

Reduced-form

120587120587119905119905= 120630120630119860119860(119871119871)120587120587119905119905minus1 + (120783120783 minus 120630120630)120587120587lowast minus 120573120573 119880119880119905119905 minus 119880119880119905119905lowast + 120574120574119885119885119905119905 + 120598120598119905119905o 119860119860(119871119871)120587120587119905119905minus1 Use four lags of past inflationo 120587120587lowast Long-run inflationldquoanchorrdquoo 119880119880119905119905 minus 119880119880119905119905lowast The unemployment gap (CBOrsquos estimate)o 119885119885119905119905 Supply-side shocks including relative prices of imports and energy goodso Sample 1998Q1ndash2018Q3

Blanchard (2016) ldquoThe Phillips Curve Back to the rsquo60srdquo ndash Shows 120630120630 declined over time and is currently very small for headline CPI

But component-level analysis implies that the measure of inflation matters

This exercise Try ten different measures of aggregate inflation

Estimating the Aggregate Phillips Curve

16

CBO

Three measures of headline inflationndash Headline CPI-U (BLS) and Headline PCEPI (BEA) ndash Chained CPI-U (BLS)

Ten Measures of Inflation

17

CBO

Seven measures of core inflationndash Approach 1 Remove the most volatile price changes

XFE CPI-U (BLS) and XFE PCEPI (BEA) Median CPI-U and 16-Trimmed-Mean CPI-U (Federal Reserve Bank of

Cleveland) Rank price changes by size each month and trim the items with price

changes that are above or below a certain threshold ldquoMedianrdquo is just extreme trimming

Trimmed-Mean PCEPI (Federal Reserve Bank of Dallas) Trimming point chosen optimally every month

ndash Approach 2 Remove the most frequent price changes Sticky CPI-U and Sticky-XFE CPI (Federal Reserve Bank of Atlanta)

Price changes every 43 months or longer (Bils and Klenow 2004)

Ten Measures of Inflation (Continued)

18

CBO

Seven Measures of Core Inflation

19

CBO

Relative weight of lagged inflation and constantldquoanchorrdquondash Overall inflation 120572120572 asymp 02 consistent with Blanchard (2016) for headline CPI

Estimation Results I

This figure plots the sum of the estimated coefficients on lagged inflation terms using recursive samples that start in 1998Q1 and end in 2012Q1 2012Q2 hellip and 2018Q1 The Phillips curve equations are ldquounrestrictedrdquo as no assumption was imposed on the value of π before the estimation Instead the intercept of the equation which in theory equals απ was estimated and then the values of α and π were calculated by assuming the long-run restriction on the estimated coefficients

20

CBO

Relative weight of lagged inflation and constantldquoanchorrdquondash Overall inflation 120572120572 asymp 02 consistent with Blanchard (2016) for headline CPIndash Core inflation 120572120572 asymp 05 particularly for non-XFE measures

Estimation Results I (Continued)

This figure plots the sum of the estimated coefficients on lagged inflation terms using recursive samples that start in 1998Q1 and end in 2012Q1 2012Q2 hellip and 2018Q1 The Phillips curve equations are ldquounrestrictedrdquo as no assumption was imposed on the value of π before the estimation Instead the intercept of the equation which in theory equals απ was estimated and then the values of α and π were calculated by assuming the long-run restriction on the estimated coefficients

21

CBO

Further analysis using survey measures of inflation expectations suggests

Inflation expectations by consumers matter more for inflation dynamics than the expectations by professional forecasters for all ten measures of inflation

ndash Consumersrsquo expectations more closely resemble those of firms (Coibion and Gorodnichenko 2015)

ndash Transmission of professional forecastersrsquo views to consumers is weak in a low-inflation environment

ndash Coibion et al (2017) Similar finding for headline CPI

Long-run inflation expectations by consumers are ldquoshock-anchoredrdquo but not ldquolevel-anchoredrdquo (Ball and Mazumder 2011)

ndash Shock-anchoring Transitory shocks not passed to expectationsndash Level-anchoring Expectations tied to a particular level

Estimation Results I (Continued)

22

CBO

Comparing measures of core inflationndash The Phillips curve fits the non-XFE measures very well

Average adj 1198771198772 of non-XFE measures = 07 Ball and Mazumder (2014) Showed this for median CPI

ndash XFEs are ldquooutliersrdquo particularly XFE CPI-U (low 120572120572 and low 1198771198772) Average adj 1198771198772 of XFE measures = 025

Possible explanationndash Fewer goods prices in the non-XFE core measures

Goods price changes are more volatile Goods price changes occur more frequently

Estimation Results II

23

CBO

CPI Components Summary Statistics and Categorization

Mean Standard Deviation

Relative Importance

(2017)

Change in Relative

Importantce 2007-2017

XFE Sticky CPIProbability

(= Median CPI) (1998-2007)

(1) (2) (3) (4) (5) (6) (7)

Core (XFE) ServicesOwners Equivalent of Rent (OER) 27 11 232 298 Y Y 52Rent of Primary Residence 32 11 79 101 Y Y 5Medical Care Services 38 13 67 233 Y Y 2Education Services 49 15 30 058 Y Y 0Transportation Services 27 18 60 -105 Y Y 5

Core (XFE) GoodsApparel -03 25 31 -189 Y N 2New Vehicles 01 23 36 -142 Y N 3Used Cars and Trucks -03 8 21 020 Y N 0Medical Care Goods 29 16 18 059 Y Y 1

Food and EnergyFood away from Home 28 09 59 019 N Y 11Food at Home 21 27 77 -201 N N 6Energy 36 202 75 078 N N 1

CategorizationSummary Statistics

Major CPI Components

The categorization of components into sticky CPI is based on Bryan and Meyer (2010) ldquoAre Some Prices in the CPI More Forward Looking Than Others We Think Sordquo Economic Commentary Federal Reserve Bank of Cleveland httpswwwfrbatlantaorg-mediadocumentsresearchinflationprojectstickypricesticky-price-cpi-supplemental-readingpdf The probabilities of a componentrsquos being the median CPI are based on the ldquorevised methodologyrdquo that split the OER into four regional components For more detail see httpswwwclevelandfedorgenour-researchindicators-and-datamedian-cpirevised-methodologyaspx

CPIU MicroPC - Gd

CPIU MicroPC - Sv

CPIU Components

CPIU MicroPC

Disaggregated PC Model

CPI and PCE weights

Dist of Price Changes (PCE)

lt02017Q12017Q22017Q32017Q42982879399018251530076497118373328794231576306846275112741969116890-22017Q12017Q22017Q32017Q4211846689120427351723027711342023221545531071181461218771897151376142-32017Q12017Q22017Q32017Q413958943933910467193842670834840815394970956904032747859413992923283-52017Q12017Q22017Q32017Q4176887169228583721572899097997604717537133523823844221799519998565525-102017Q12017Q22017Q32017Q482906102250864162821465544005778097459146483527973784429446756549655gt102017Q12017Q22017Q32017Q490482660159195003936531226468855499268986388255841612510045272509943

Percent of Expenditures

24

CBO

The slope of the Phillips curve Flat but steeper for CPIs than PCEPIsndash 120573120573 = 005∿01 for PCEPIs but = 01∿02 for CPIsndash Why Shelter the most cyclically sensitive component has a much larger weight in CPI than in PCEPI

Estimation Results III

This figure plots the sum of the estimated coefficients on lagged inflation terms using recursive samples that start in 1998Q1 and end in 2012Q1 2012Q2 hellip and 2018Q1 The Phillips curve equations are ldquounrestrictedrdquo as no assumption was imposed on the value of π before the estimation Instead the intercept of the equation which in theory equals απ was estimated and then the values of α and π were calculated by assuming the long-run restriction on the estimated coefficients

25

CBO

The slope of the Phillips curve Flat but steeper for CPIs than PCEPIsndash 120573120573 = 005∿01 for PCEPIs but = 01∿02 for CPIsndash Why Shelter the most cyclically sensitive component has a much larger weight in CPI than in PCEPI

Estimation Results III (Continued)

This figure plots the sum of the estimated coefficients on lagged inflation terms using recursive samples that start in 1998Q1 and end in 2012Q1 2012Q2 hellip and 2018Q1 The Phillips curve equations are ldquounrestrictedrdquo as no assumption was imposed on the value of π before the estimation Instead an intercept of the equation which in theory equals απ was estimated and then the value of α and π were calculated by assuming the long-run restriction on the estimated coefficients

26

CBO

Reviewing the Findings

27

CBO

Phillips-curve analysis at the component level provides insight intondash Cyclical sensitivity of aggregate inflation

For most service components and food inflation process is pro-cyclical For most non-food good components inflation process is not pro-cyclical

Need better understanding and models for goods price inflationndash Difference in the behaviors of various inflation measures

CPI is more cyclically sensitive than PCEPI because shelter has larger share in CPI

Non-XFE measures of core inflation better capture movements in trend inflation because they contain fewer noisy goods components

The aggregate Phillips curve has shifted away from ldquoaccelerationistrdquo toward an ldquoanchoredrdquo form but the process appears incomplete

ndash Need better understanding of the formation process of inflation expectations particularly those of consumers and firms

Conclusions

28

CBO

Abdih Yasser Ravi Balakrishnan and Baoping Shang ldquoWhat Is Keeping US Core Inflation Low Insights From a Bottom-Up Approachrdquo International Monetary Fund 2016

Ball Laurence and Sandeep Mazumder ldquoInflation Dynamics and the Great Recessionrdquo Brookings Papers on Economic Activity (2011) 337ndash406

Blanchard Olivier ldquoThe Phillips Curve Back to the rsquo60s American Economic Review 1065 (2016) 31ndash34

Bils Mark and Peter J Klenow ldquoSome Evidence on the Importance of Sticky Pricesrdquo Journal of Political Economy 1125 (2004) 947ndash985

Coibion Olivier and Yuriy Gorodnichenko ldquoIs the Phillips Curve Alive and Well After All Inflation Expectations and the Missing Disinflationrdquo American Economic Journal Macroeconomics 71 (2015) 197ndash232

References

29

CBO

Coibion Olivier Yuriy Gorodnichenko and Rupal Kamdar ldquoThe Formation of Expectations Inflation and the Phillips Curverdquo No w23304 National Bureau of Economic Research 2017

Goolsbee Austan D and Peter J Klenow ldquoInternet Rising Prices Falling Measuring Inflation in a World of E-Commercerdquo AEA Papers and Proceedings Vol 108 2018

Stock J and Mark Watson ldquoSlack and Cyclically Sensitive Inflationrdquo ECB Forum on Central Banking Sintra Portugal 2018

Struyven Dann ldquoWhich Prices Still Respond to Slackrdquo Goldman Sachs Economics Research (October 31 2017)

References (Continued)

  • Inflation and the Phillips Curve
  • Inflation 1948ndash2018
  • Inflation Expectations 1948ndash2018
  • Unemployment 1948ndash2018
  • Structure of CBOrsquos Model for the Personal Consumption Expenditures (PCE) Price Index
  • Expectation-Augmented Phillips Curve
  • Slide Number 7
  • Phillips Curve Model at the Component Level
  • Shelter Inflation
  • Auto Inflation
  • Services Largely Pro-Cyclical
  • Goods Largely Not Pro-Cyclical Except Food
  • Goods Versus Services Possible Explanations
  • Forecasting Inflation at the Component Level
  • Slide Number 15
  • Estimating the Aggregate Phillips Curve
  • Ten Measures of Inflation
  • Ten Measures of Inflation (Continued)
  • Seven Measures of Core Inflation
  • Estimation Results I
  • Estimation Results I (Continued)
  • Estimation Results I (Continued)
  • Estimation Results II
  • CPI Components Summary Statistics and Categorization
  • Estimation Results III
  • Estimation Results III (Continued)
  • Slide Number 27
  • Conclusions
  • References
  • References (Continued)
Current vintage data
Dec-16 Jan-17 Feb-17 Mar-17 Apr-17 May-17 Jun-17 Jul-17 Aug-17 Sep-17 Oct-17 Nov-17 Dec-17
Rose at 0-2 rate 314 179 190 266 178 158 181 206 275 165 181 224 251
Rose at 2-3 rate 82 137 111 171 191 280 111 130 116 216 88 97 39
Rose at 3-5 rate 240 198 253 80 126 136 209 161 241 125 231 258 177
Rose at 5-10 rate 100 122 57 70 71 85 91 60 51 114 50 122 81
Rose faster than 10 rate 67 137 108 27 151 55 75 116 65 97 159 82 134
227 281 387 282 286 334 328 253 283 291 218 317
212 172 215455310712 218771897151
140 194 153949709569 74785941399
177 157 175371335238 221799519999
83 82 74591464835 84429446757
90 94 92689863883 125100452725
298 301 287942315763 275112741969
2017Q1 2017Q2 2017Q3 2017Q4
Fell 2983 3008 2879 2751
Rose at 0-2 rate 2118 1723 2155 2188
Rose at 2-3 rate 1396 1938 1539 748
Rose at 3-5 rate 1769 1573 1754 2218
Rose at 5-10 rate 829 821 746 844
Rose faster than 10 rate 905 937 927 1251
Major Sectors CPI PCEPI
Housing 426 183
Health Care 85 231
Food and Beverages 146 137
Transportation 153 90
Recreation 57 89
Education and Communication 70 46
Apparel 30 29
Financial Services 02 47
Other 30 147
Total 100 100
Data December 2016
Naiumlve Phillips-Curve-Style Models (Sample 1998-2017)
8 9 10 11
Variables Constant Lagged Inflation Unemployment Gap Adjusted R2 Order of AR Order of Lagged Rucgap
Owners Equivalent of Rent 118 062 -022 078 1 1
(48) (79) -(40)
Rent of Primary Residence 141 060 -018 084 1 4
(48) (74) -(33)
Medical Care Services 131 067 -007 032 2
(27) (58) -(09)
Education Services 023 095 -009 078 4 2
(07) (149) -(16)
Transportation Services 26 01 -00 018 1 3
(59) (05) -(02)
Apparel -060 027 043 016 4 0
-(19) (15) (23)
New Vehicles -046 003 065 018 1 0
-(17) (03) (39)
Used Cars and Trucks -001 031 092 028 2 4
-(00) (35) (19)
Medical Care Goods 23 02 -01 023 3
(51) (14) -(08)
Food away from Home 116 060 -008 050 1 2
(40) (62) -(15)
Food at Home 105 063 -009 059 1
(37) (86) -(07)
Energy 983 -022 -061 048 1
(48) -(22) -(06)
Unemployment Gap Lagged Inflation Constant Adjusted R2 Obs Durbin-Watson Statistic Order of Lagged Inflation Order of Lagged Unemployment Gap
Services
Owners Equivalent of Rent -021 062 113 078 83 171 1 1
000 000 024
Rent of Primary Residence -015 067 116 084 83 217 1 5
000 000 026
Food away from Home -008 061 108 057 83 251 2 2
007 000 025
Medical Care Services -005 070 115 034 83 201 2 0
051 000 045
Education Services -007 093 030 081 83 202 4 2
016 000 029
Transportation Services -002 -011 320 016 83 198 2 3
087 027 036
Goods
Apparel 050 010 -054 008 83 192 4 0
001 039 032
New Vehicles 038 002 -034 034 83 186 1 0
001 084 023
Used Cars and Trucks 038 018 -019 034 83 174 2 4
047 013 082
Food at Home -005 065 103 057 83 237 1 0
072 000 027
Medical Care Goods -005 046 169 056 83 196 3 0
053 000 028
Controlling Inflnm + Inflne
Unemployment Gap Lagged Inflation Constant Adjusted R2 Observations Durbin-Watson Statistic Order of Lagged Inflation Order of Lagged Unemployment Gap
Owners Equivalent of Rent (OER) -0212 0633 1120 077 80 179 1 1
(0058) (0082) (0260)
Rent of Primary Residence -0171 0604 1395 084 80 201 1 5
(0056) (0085) (0308)
Medical Care Services -0070 0693 1191 031 80 205 2 0
(0083) (0123) (0514)
Education Services -0087 0947 0296 078 80 204 4 2
(0055) (0067) (0354)
Transportation Services -0035 0154 2284 019 80 203 2 3
(0130) (0160) (0485)
Apparel 0416 0305 -0594 015 80 187 4 0
(0187) (0178) (0327)
New Vehicles 0655 0021 -0494 017 80 200 1 0
(0169) (0112) (0287)
Used Cars and Trucks 0410 0215 -0860 038 80 185 2 4
(0535) (0114) (0902)
Medical Care Goods -0082 0202 2251 022 80 192 3 0
(0105) (0141) (0458)
Food away from Home -0086 0613 1159 059 80 236 2 2
(0132) (0074) (0302)
Food at Home -0065 0751 0781 053 80 216 1 0
(0049) (0116) (0340)
Energy -0735 0068 2120 096 80 134 2 0
(0311) (0035) (0651)
Controlling Inflnm
Unemployment Gap Lagged Inflation Constant Adjusted R2 Observations Durbin-Watson Statistic Order of Lagged Inflation Order of Lagged Unemployment Gap
Core (XFE) Services
Owners Equivalent of Rent (OER) -0212 0632 1129 078 80 180 1 1
(0058) (0081) (0257)
Rent of Primary Residence -0171 0605 1393 084 80 201 1 5
(0055) (0084) (0302)
Medical Care Services -0068 0696 1189 032 80 205 2 0
(0082) (0122) (0511)
Education Services -0087 0943 0287 078 80 201 4 2
(0055) (0067) (0353)
Transportation Services -0030 0076 2602 017 80 202 2 3
(0131) (0152) (0440)
Apparel 0426 0292 -0544 016 80 189 4 0
(0186) (0176) (0315)
New Vehicles 0658 0023 -0436 017 80 196 1 0
(0168) (0112) (0272)
Used Cars and Trucks 0399 0190 -0322 036 80 171 2 4
(0543) (0115) (0861)
Medical Care Goods -0080 0203 2289 022 80 193 3 0
(0104) (0140) (0453)
Food away from Home -0090 0628 1038 059 80 237 2 2
(0132) (0073) (0282)
Food at Home -0064 0754 0741 053 80 216 1 0
(0049) (0116) (0338)
Energy -0678 -0305 10270 049 80 198 2 0
(1085) (0114) (2053)
Major CPI Components Summary Statistics Categorization
Mean Standard Deviation Relative Importance (2017) Change in Relative Importantce 2007-2017 XFE Sticky CPI Probability (= Median CPI) (1998-2007)
1 2 3 4 5 6 7
Core (XFE) Services
Owners Equivalent of Rent (OER) 27 11 232 298 Y Y 52
Rent of Primary Residence 32 11 79 101 Y Y 5
Medical Care Services 38 13 67 233 Y Y 2
Education Services 49 15 30 058 Y Y 0
Transportation Services 27 18 60 -105 Y Y 5
Core (XFE) Goods
Apparel -03 25 31 -189 Y N 2
New Vehicles 01 23 36 -142 Y N 3
Used Cars and Trucks -03 8 21 020 Y N 0
Medical Care Goods 29 16 18 059 Y Y 1
Food and Energy
Food away from Home 28 09 59 019 N Y 11
Food at Home 21 27 77 -201 N N 6
Energy 36 202 75 078 N N 1
Unemployment Gap Lagged Inflation Constant Adjusted R2 Observations Durbin-Watson Statistic
PCE Services Less Energy -014 032 191 046 83 185
(000) (001) (035)
PCE Housing Services -023 058 129 080 83 208
(000) (000) (024)
CPI-U Owners Equivalent of Rent -021 062 113 078 83 171
(000) (000) (024)
CPI-U Rent of Primary Residence -015 067 116 084 83 217
(000) (000) (026)
PCE Health Care Services -006 062 092 042 83 207
(038) (000) (026)
PCE Services Less Energy Rent of Shelter amp Health care -004 035 172 038 83 226
(050) (000) (028)
CPI-U Services Less Energy Services amp Rent of Shelter -015 040 188 034 83 218
(001) (000) (040)
CPI-U Medical Care Services -005 070 115 034 83 201
(051) (000) (045)
CPI-U Food away from Home -009 062 105 057 83 264
(005) (000) (025)
CPI-U Education Services -007 093 030 081 83 202
(016) (000) (029)
CPI-U Transportation Services -002 -011 320 016 83 198
(087) (027) (036)
Unemployment Gap Lagged Inflation Constant Adjusted R2 Observations Durbin-Watson Statistic
PCE Durable Goods 008 028 -154 027 83 183
(031) (001) (024)
PCE Motor Vehicles and Parts 031 030 -021 043 83 178
(005) (000) (025)
PCE Video Audio Photo amp 016 060 -395 044 83 222
Information Processing Equipment amp Media (034) (000) (087)
PCE Other Durable Goods (including Medical Equipments) -010 038 -050 027 83 188
(028) (000) (019)
PCE Nondurable Goods Less Energy -014 073 039 044 83 203
(005) (000) (017)
PCE Food amp Beverage Purchased for Off-Premises Consumption -024 066 071 055 83 226
(004) (000) (024)
CPI-U Food at Home -027 063 082 052 83 216
(005) (000) (028)
CPI-U Alcoholic Beverages -017 034 147 016 83 209
(004) (000) (026)
PCE Pharmaceutical amp Other Medical Products -002 033 202 020 83 173
(088) (000) (039)
PCE Other Nondurable Goods 008 025 000 042 83 179
(046) (001) (018)
CPI-U Apparel 054 014 -069 022 83 191
(000) (018) (030)
Current vintage data
Dec-16 Jan-17 Feb-17 Mar-17 Apr-17 May-17 Jun-17 Jul-17 Aug-17 Sep-17 Oct-17 Nov-17 Dec-17
Rose at 0-2 rate 314 179 190 266 178 158 181 206 275 165 181 224 251
Rose at 2-3 rate 82 137 111 171 191 280 111 130 116 216 88 97 39
Rose at 3-5 rate 240 198 253 80 126 136 209 161 241 125 231 258 177
Rose at 5-10 rate 100 122 57 70 71 85 91 60 51 114 50 122 81
Rose faster than 10 rate 67 137 108 27 151 55 75 116 65 97 159 82 134
227 281 387 282 286 334 328 253 283 291 218 317
212 172 215455310712 218771897151
140 194 153949709569 74785941399
177 157 175371335238 221799519999
83 82 74591464835 84429446757
90 94 92689863883 125100452725
298 301 287942315763 275112741969
2017Q1 2017Q2 2017Q3 2017Q4
Fell 2983 3008 2879 2751
Rose at 0-2 rate 2118 1723 2155 2188
Rose at 2-3 rate 1396 1938 1539 748
Rose at 3-5 rate 1769 1573 1754 2218
Rose at 5-10 rate 829 821 746 844
Rose faster than 10 rate 905 937 927 1251
Major Sectors CPI PCEPI
Housing 426 183
Health Care 85 231
Food and Beverages 146 137
Transportation 153 90
Recreation 57 89
Education and Communication 70 46
Apparel 30 29
Financial Services 02 47
Other 30 147
Total 100 100
Data December 2016
Naiumlve Phillips-Curve-Style Models (Sample 1998-2017)
8 9 10 11
Variables Constant Lagged Inflation Unemployment Gap Adjusted R2 Order of AR Order of Lagged Rucgap
Owners Equivalent of Rent 118 062 -022 078 1 1
(48) (79) -(40)
Rent of Primary Residence 141 060 -018 084 1 4
(48) (74) -(33)
Medical Care Services 131 067 -007 032 2
(27) (58) -(09)
Education Services 023 095 -009 078 4 2
(07) (149) -(16)
Transportation Services 26 01 -00 018 1 3
(59) (05) -(02)
Apparel -060 027 043 016 4 0
-(19) (15) (23)
New Vehicles -046 003 065 018 1 0
-(17) (03) (39)
Used Cars and Trucks -001 031 092 028 2 4
-(00) (35) (19)
Medical Care Goods 23 02 -01 023 3
(51) (14) -(08)
Food away from Home 116 060 -008 050 1 2
(40) (62) -(15)
Food at Home 105 063 -009 059 1
(37) (86) -(07)
Energy 983 -022 -061 048 1
(48) -(22) -(06)
Unemployment Gap Lagged Inflation Constant Adjusted R2 Obs Durbin-Watson Statistic Order of Lagged Inflation Order of Lagged Unemployment Gap
Services
Owners Equivalent of Rent -021 062 113 078 83 171 1 1
000 000 024
Rent of Primary Residence -015 067 116 084 83 217 1 5
000 000 026
Food away from Home -008 061 108 057 83 251 2 2
007 000 025
Medical Care Services -005 070 115 034 83 201 2 0
051 000 045
Education Services -007 093 030 081 83 202 4 2
016 000 029
Transportation Services -002 -011 320 016 83 198 2 3
087 027 036
Goods
Apparel 050 010 -054 008 83 192 4 0
001 039 032
New Vehicles 038 002 -034 034 83 186 1 0
001 084 023
Used Cars and Trucks 038 018 -019 034 83 174 2 4
047 013 082
Food at Home -005 065 103 057 83 237 1 0
072 000 027
Medical Care Goods -005 046 169 056 83 196 3 0
053 000 028
Controlling Inflnm + Inflne
Unemployment Gap Lagged Inflation Constant Adjusted R2 Observations Durbin-Watson Statistic Order of Lagged Inflation Order of Lagged Unemployment Gap
Owners Equivalent of Rent (OER) -0212 0633 1120 077 80 179 1 1
(0058) (0082) (0260)
Rent of Primary Residence -0171 0604 1395 084 80 201 1 5
(0056) (0085) (0308)
Medical Care Services -0070 0693 1191 031 80 205 2 0
(0083) (0123) (0514)
Education Services -0087 0947 0296 078 80 204 4 2
(0055) (0067) (0354)
Transportation Services -0035 0154 2284 019 80 203 2 3
(0130) (0160) (0485)
Apparel 0416 0305 -0594 015 80 187 4 0
(0187) (0178) (0327)
New Vehicles 0655 0021 -0494 017 80 200 1 0
(0169) (0112) (0287)
Used Cars and Trucks 0410 0215 -0860 038 80 185 2 4
(0535) (0114) (0902)
Medical Care Goods -0082 0202 2251 022 80 192 3 0
(0105) (0141) (0458)
Food away from Home -0086 0613 1159 059 80 236 2 2
(0132) (0074) (0302)
Food at Home -0065 0751 0781 053 80 216 1 0
(0049) (0116) (0340)
Energy -0735 0068 2120 096 80 134 2 0
(0311) (0035) (0651)
Controlling Inflnm
Unemployment Gap Lagged Inflation Constant Adjusted R2 Observations Durbin-Watson Statistic Order of Lagged Inflation Order of Lagged Unemployment Gap
Core (XFE) Services
Owners Equivalent of Rent (OER) -0212 0632 1129 078 80 180 1 1
(0058) (0081) (0257)
Rent of Primary Residence -0171 0605 1393 084 80 201 1 5
(0055) (0084) (0302)
Medical Care Services -0068 0696 1189 032 80 205 2 0
(0082) (0122) (0511)
Education Services -0087 0943 0287 078 80 201 4 2
(0055) (0067) (0353)
Transportation Services -0030 0076 2602 017 80 202 2 3
(0131) (0152) (0440)
Apparel 0426 0292 -0544 016 80 189 4 0
(0186) (0176) (0315)
New Vehicles 0658 0023 -0436 017 80 196 1 0
(0168) (0112) (0272)
Used Cars and Trucks 0399 0190 -0322 036 80 171 2 4
(0543) (0115) (0861)
Medical Care Goods -0080 0203 2289 022 80 193 3 0
(0104) (0140) (0453)
Food away from Home -0090 0628 1038 059 80 237 2 2
(0132) (0073) (0282)
Food at Home -0064 0754 0741 053 80 216 1 0
(0049) (0116) (0338)
Energy -0678 -0305 10270 049 80 198 2 0
(1085) (0114) (2053)
Major CPI Components Summary Statistics Categorization
Mean Standard Deviation Relative Importance (2017Q4) Change in Relative Importantce CPI Excluding Food and Energy Sticky CPI Probability (= Median CPI) (1998-2007)
1 2 3 4 5 6 7
Core (XFE) Services
Owners Equivalent of Rent (OER) 27 11 232 298 Y Y 52
Rent of Primary Residence 32 11 79 101 Y Y 5
Medical Care Services 38 13 67 233 Y Y 2
Education Services 49 15 30 058 Y Y 0
Transportation Services 27 18 60 -105 Y Y 5
Core (XFE) Goods
Apparel -03 25 31 -189 Y N 2
New Vehicles 01 23 36 -142 Y N 3
Used Cars and Trucks -03 8 21 020 Y N 0
Medical Care Goods 29 16 18 059 Y Y 1
Food and Energy
Food away from Home 28 09 59 019 N Y 11
Food at Home 21 27 77 -201 N N 6
Energy 36 202 75 078 N N 1
Unemployment Gap Lagged Inflation Constant Adjusted R2 Observations Durbin-Watson Statistic
PCE Services Less Energy -014 032 191 046 83 185
(000) (001) (035)
PCE Housing Services -023 058 129 080 83 208
(000) (000) (024)
CPI-U Owners Equivalent of Rent -021 062 113 078 83 171
(000) (000) (024)
CPI-U Rent of Primary Residence -015 067 116 084 83 217
(000) (000) (026)
PCE Health Care Services -006 062 092 042 83 207
(038) (000) (026)
PCE Services Less Energy Rent of Shelter amp Health care -004 035 172 038 83 226
(050) (000) (028)
CPI-U Services Less Energy Services amp Rent of Shelter -015 040 188 034 83 218
(001) (000) (040)
CPI-U Medical Care Services -005 070 115 034 83 201
(051) (000) (045)
CPI-U Food away from Home -009 062 105 057 83 264
(005) (000) (025)
CPI-U Education Services -007 093 030 081 83 202
(016) (000) (029)
CPI-U Transportation Services -002 -011 320 016 83 198
(087) (027) (036)
Unemployment Gap Lagged Inflation Constant Adjusted R2 Observations Durbin-Watson Statistic
PCE Durable Goods 008 028 -154 027 83 183
(031) (001) (024)
PCE Motor Vehicles and Parts 031 030 -021 043 83 178
(005) (000) (025)
PCE Video Audio Photo amp 016 060 -395 044 83 222
Information Processing Equipment amp Media (034) (000) (087)
PCE Other Durable Goods (including Medical Equipments) -010 038 -050 027 83 188
(028) (000) (019)
PCE Nondurable Goods Less Energy -014 073 039 044 83 203
(005) (000) (017)
PCE Food amp Beverage Purchased for Off-Premises Consumption -024 066 071 055 83 226
(004) (000) (024)
CPI-U Food at Home -027 063 082 052 83 216
(005) (000) (028)
CPI-U Alcoholic Beverages -017 034 147 016 83 209
(004) (000) (026)
PCE Pharmaceutical amp Other Medical Products -002 033 202 020 83 173
(088) (000) (039)
PCE Other Nondurable Goods 008 025 000 042 83 179
(046) (001) (018)
CPI-U Apparel 054 014 -069 022 83 191
(000) (018) (030)
Current vintage data
Dec-16 Jan-17 Feb-17 Mar-17 Apr-17 May-17 Jun-17 Jul-17 Aug-17 Sep-17 Oct-17 Nov-17 Dec-17
Rose at 0-2 rate 314 179 190 266 178 158 181 206 275 165 181 224 251
Rose at 2-3 rate 82 137 111 171 191 280 111 130 116 216 88 97 39
Rose at 3-5 rate 240 198 253 80 126 136 209 161 241 125 231 258 177
Rose at 5-10 rate 100 122 57 70 71 85 91 60 51 114 50 122 81
Rose faster than 10 rate 67 137 108 27 151 55 75 116 65 97 159 82 134
227 281 387 282 286 334 328 253 283 291 218 317
212 172 215455310712 218771897151
140 194 153949709569 74785941399
177 157 175371335238 221799519999
83 82 74591464835 84429446757
90 94 92689863883 125100452725
298 301 287942315763 275112741969
2017Q1 2017Q2 2017Q3 2017Q4
Fell 2983 3008 2879 2751
Rose at 0-2 rate 2118 1723 2155 2188
Rose at 2-3 rate 1396 1938 1539 748
Rose at 3-5 rate 1769 1573 1754 2218
Rose at 5-10 rate 829 821 746 844
Rose faster than 10 rate 905 937 927 1251
Major Sectors CPI PCEPI
Housing 426 183
Health Care 85 231
Food and Beverages 146 137
Transportation 153 90
Recreation 57 89
Education and Communication 70 46
Apparel 30 29
Financial Services 02 47
Other 30 147
Total 100 100
Data December 2016
Naiumlve Phillips-Curve-Style Models (Sample 1998-2017)
8 9 10 11
Variables Constant Lagged Inflation Unemployment Gap Adjusted R2 Order of AR Order of Lagged Rucgap
Owners Equivalent of Rent 118 062 -022 078 1 1
(48) (79) -(40)
Rent of Primary Residence 141 060 -018 084 1 4
(48) (74) -(33)
Medical Care Services 131 067 -007 032 2
(27) (58) -(09)
Education Services 023 095 -009 078 4 2
(07) (149) -(16)
Transportation Services 26 01 -00 018 1 3
(59) (05) -(02)
Apparel -060 027 043 016 4 0
-(19) (15) (23)
New Vehicles -046 003 065 018 1 0
-(17) (03) (39)
Used Cars and Trucks -001 031 092 028 2 4
-(00) (35) (19)
Medical Care Goods 23 02 -01 023 3
(51) (14) -(08)
Food away from Home 116 060 -008 050 1 2
(40) (62) -(15)
Food at Home 105 063 -009 059 1
(37) (86) -(07)
Energy 983 -022 -061 048 1
(48) -(22) -(06)
Unemployment Gap Lagged Inflation Constant Adjusted R2 Obs Durbin-Watson Statistic Order of Lagged Inflation Order of Lagged Unemployment Gap
Services
Owners Equivalent of Rent -021 062 113 078 83 171 1 1
000 000 024
Rent of Primary Residence -015 067 116 084 83 217 1 5
000 000 026
Food away from Home -008 061 108 057 83 251 2 2
007 000 025
Medical Care Services -005 070 115 034 83 201 2 0
051 000 045
Education Services -007 093 030 081 83 202 4 2
016 000 029
Transportation Services -002 -011 320 016 83 198 2 3
087 027 036
Goods
Apparel 050 010 -054 008 83 192 4 0
001 039 032
New Vehicles 038 002 -034 034 83 186 1 0
001 084 023
Used Cars and Trucks 038 018 -019 034 83 174 2 4
047 013 082
Food at Home -005 065 103 057 83 237 1 0
072 000 027
Medical Care Goods -005 046 169 056 83 196 3 0
053 000 028
Controlling Inflnm + Inflne
Unemployment Gap Lagged Inflation Constant Adjusted R2 Observations Durbin-Watson Statistic Order of Lagged Inflation Order of Lagged Unemployment Gap
Owners Equivalent of Rent (OER) -0212 0633 1120 077 80 179 1 1
(0058) (0082) (0260)
Rent of Primary Residence -0171 0604 1395 084 80 201 1 5
(0056) (0085) (0308)
Medical Care Services -0070 0693 1191 031 80 205 2 0
(0083) (0123) (0514)
Education Services -0087 0947 0296 078 80 204 4 2
(0055) (0067) (0354)
Transportation Services -0035 0154 2284 019 80 203 2 3
(0130) (0160) (0485)
Apparel 0416 0305 -0594 015 80 187 4 0
(0187) (0178) (0327)
New Vehicles 0655 0021 -0494 017 80 200 1 0
(0169) (0112) (0287)
Used Cars and Trucks 0410 0215 -0860 038 80 185 2 4
(0535) (0114) (0902)
Medical Care Goods -0082 0202 2251 022 80 192 3 0
(0105) (0141) (0458)
Food away from Home -0086 0613 1159 059 80 236 2 2
(0132) (0074) (0302)
Food at Home -0065 0751 0781 053 80 216 1 0
(0049) (0116) (0340)
Energy -0735 0068 2120 096 80 134 2 0
(0311) (0035) (0651)
Controlling Inflnm
Unemployment Gap Lagged Inflation Constant Adjusted R2 Observations Durbin-Watson Statistic Order of Lagged Inflation Order of Lagged Unemployment Gap
Core (XFE) Services
Owners Equivalent of Rent (OER) -0212 0632 1129 078 80 180 1 1
(0058) (0081) (0257)
Rent of Primary Residence -0171 0605 1393 084 80 201 1 5
(0055) (0084) (0302)
Medical Care Services -0068 0696 1189 032 80 205 2 0
(0082) (0122) (0511)
Education Services -0087 0943 0287 078 80 201 4 2
(0055) (0067) (0353)
Transportation Services -0030 0076 2602 017 80 202 2 3
(0131) (0152) (0440)
Apparel 0426 0292 -0544 016 80 189 4 0
(0186) (0176) (0315)
New Vehicles 0658 0023 -0436 017 80 196 1 0
(0168) (0112) (0272)
Used Cars and Trucks 0399 0190 -0322 036 80 171 2 4
(0543) (0115) (0861)
Medical Care Goods -0080 0203 2289 022 80 193 3 0
(0104) (0140) (0453)
Food away from Home -0090 0628 1038 059 80 237 2 2
(0132) (0073) (0282)
Food at Home -0064 0754 0741 053 80 216 1 0
(0049) (0116) (0338)
Energy -0678 -0305 10270 049 80 198 2 0
(1085) (0114) (2053)
Major CPI Components Summary Statistics Categorization
Mean Standard Deviation Relative Importance (2017Q4) Change in Relative Importantce CPI Excluding Food and Energy Sticky CPI Probability (= Median CPI) (1998-2007)
1 2 3 4 5 6 7
Core (XFE) Services
Owners Equivalent of Rent (OER) 27 11 232 298 Y Y 52
Rent of Primary Residence 32 11 79 101 Y Y 5
Medical Care Services 38 13 67 233 Y Y 2
Education Services 49 15 30 058 Y Y 0
Transportation Services 27 18 60 -105 Y Y 5
Core (XFE) Goods
Apparel -03 25 31 -189 Y N 2
New Vehicles 01 23 36 -142 Y N 3
Used Cars and Trucks -03 8 21 020 Y N 0
Medical Care Goods 29 16 18 059 Y Y 1
Food and Energy
Food away from Home 28 09 59 019 N Y 11
Food at Home 21 27 77 -201 N N 6
Energy 36 202 75 078 N N 1
Unemployment Gap Lagged Inflation Constant Adjusted R2 Observations Durbin-Watson Statistic
PCE Services Less Energy -014 032 191 046 83 185
(000) (001) (035)
PCE Housing Services -023 058 129 080 83 208
(000) (000) (024)
CPI-U Owners Equivalent of Rent -021 062 113 078 83 171
(000) (000) (024)
CPI-U Rent of Primary Residence -015 067 116 084 83 217
(000) (000) (026)
PCE Health Care Services -006 062 092 042 83 207
(038) (000) (026)
PCE Services Less Energy Rent of Shelter amp Health care -004 035 172 038 83 226
(050) (000) (028)
CPI-U Services Less Energy Services amp Rent of Shelter -015 040 188 034 83 218
(001) (000) (040)
CPI-U Medical Care Services -005 070 115 034 83 201
(051) (000) (045)
CPI-U Food away from Home -009 062 105 057 83 264
(005) (000) (025)
CPI-U Education Services -007 093 030 081 83 202
(016) (000) (029)
CPI-U Transportation Services -002 -011 320 016 83 198
(087) (027) (036)
Unemployment Gap Lagged Inflation Constant Adjusted R2 Observations Durbin-Watson Statistic
PCE Durable Goods 008 028 -154 027 83 183
(031) (001) (024)
PCE Motor Vehicles and Parts 031 030 -021 043 83 178
(005) (000) (025)
PCE Video Audio Photo amp 016 060 -395 044 83 222
Information Processing Equipment amp Media (034) (000) (087)
PCE Other Durable Goods (including Medical Equipments) -010 038 -050 027 83 188
(028) (000) (019)
PCE Nondurable Goods Less Energy -014 073 039 044 83 203
(005) (000) (017)
PCE Food amp Beverage Purchased for Off-Premises Consumption -024 066 071 055 83 226
(004) (000) (024)
CPI-U Food at Home -027 063 082 052 83 216
(005) (000) (028)
CPI-U Alcoholic Beverages -017 034 147 016 83 209
(004) (000) (026)
PCE Pharmaceutical amp Other Medical Products -002 033 202 020 83 173
(088) (000) (039)
PCE Other Nondurable Goods 008 025 000 042 83 179
(046) (001) (018)
CPI-U Apparel 054 014 -069 022 83 191
(000) (018) (030)
Page 5: Inflation and the Phillips Curve · Phillips curve is so flat Method: Estimating Phillips curve equations at the component level – Measure of slack: The unemployment gap (CBO’s

4

CBO

This flow chart shows the structure of CBOrsquos inflation model for the PCEPI as well as the spending shares for its components Those components include PCNFOOD Food amp Beverage Purchases for Off-Premises Consumption PCNENERGY Gasoline amp Other Energy Goods PCSENERGY Electricity and Gas PCDELEC Video Audio Photo amp Info Processing Equipment amp Media PCDMVAP Motor Vehicles amp Parts PCDMED Therapeutic Appliances amp Equipment PCDOTH Other Durable Goods (CBOrsquos calculation) PCNMED Pharmaceutical amp Other Medical Products PCNOTH Other Nondurable Goods (CBOrsquos calculation) PCSHOUS Housing PCSMED Health Care Services and PCSOTH Other Services (CBOrsquos calculation)

Structure of CBOrsquos Model for the Personal Consumption Expenditures (PCE) Price Index

5

CBO

120587120587119905119905= 119864119864119905119905120587120587119905119905+1 minus 120631120631 119880119880119905119905 minus 119880119880lowast + 120574120574119885119885119905119905 + 120598120598119905119905

Determinants of inflationndash 119864119864119905119905120587120587119905119905+1 Inflation expectationsndash 120573120573 119880119880119905119905 minus 119880119880lowast Unemployment gap or other measures of slack in the economyndash 120574120574119885119885119905119905 Supply-side shocks (for example relative price of imports energy etc)

Issue 1 Cyclical sensitivity of inflationndash For the price index of personal consumption expenditures (PCEPI) excluding food

and energy (ldquoXFErdquo or ldquocore-XFErdquo) 120573120573 has declined from 03~04 in the 1970s to 005~01 in the most recent decades

ndash Does inflation still respond to slack

Issue 2 The form of inflation expectationsndash ldquoAccelerationistrdquo 119864119864119905119905120587120587119905119905+1= 119860119860 119871119871 120587120587119905119905minus1 (distributed lags of inflation)ndash ldquoAnchoredrdquo 119864119864119905119905120587120587119905119905+1= 120587120587lowast (constant)ndash Combined 119864119864119905119905120587120587119905119905+1=120630120630119860119860(119871119871)120587120587119905119905minus1 + (120783120783 minus 120630120630)120587120587lowast

Expectation-Augmented Phillips Curve

6

CBO

Cyclical Sensitivity of InflationGoods Versus Services

7

CBO

Goal Understanding why the aggregate Phillips curve is so flat

Method Estimating Phillips curve equations at the component levelndash Measure of slack The unemployment gap (CBOrsquos estimate)ndash Sample 1998Q1ndash2018Q3 (stable inflation expectations)ndash Control for Relative price of imports and energy goods outliers (for example ldquocash

for clunkersrdquo)ndash Similar to Stock and Watson (2018) Struyven (2017)

Main Finding Divergence between goods and services in terms of cyclical sensitivity

ndash Services Remained largely pro-cyclicalmdashfor example shelterndash Goods Not pro-cyclical in the past two decades

Dampening the slope of the aggregate Phillips curve Exception Food prices

Phillips Curve Model at the Component Level

8

CBO

Shelter Inflation

9

CBO

Auto Inflation

10

CBO

Services Largely Pro-Cyclical

Unemployment Gap

Lagged Inflation Constant Adjusted R2

PCE Services Less Energy -014 032 191 046(000) (001) (035)

PCE Housing Services -023 058 129 080(000) (000) (024)

CPI-U Owners Equivalent of Rent -021 062 113 078(000) (000) (024)

CPI-U Rent of Primary Residence -015 067 116 084(000) (000) (026)

PCE Health Care Services -006 062 092 042(038) (000) (026)

PCE Services Less Energy Rent of Shelter amp Health care -004 035 172 038(050) (000) (028)

CPI-U Services Less Energy Services amp Rent of Shelter -015 040 188 034(001) (000) (040)

CPI-U Medical Care Services -005 070 115 034(051) (000) (045)

CPI-U Food away from Home -009 062 105 057(005) (000) (025)

CPI-U Education Services -007 093 030 081(016) (000) (029)

CPI-U Transportation Services -002 -011 320 016(087) (027) (036)

CPIU MicroPC - Gd

CPIU MicroPC - Sv

CPIU Components

CPIU MicroPC

Disaggregated PC Model

CPI and PCE weights

Dist of Price Changes (PCE)

lt02017Q12017Q22017Q32017Q42982879399018251530076497118373328794231576306846275112741969116890-22017Q12017Q22017Q32017Q4211846689120427351723027711342023221545531071181461218771897151376142-32017Q12017Q22017Q32017Q413958943933910467193842670834840815394970956904032747859413992923283-52017Q12017Q22017Q32017Q4176887169228583721572899097997604717537133523823844221799519998565525-102017Q12017Q22017Q32017Q482906102250864162821465544005778097459146483527973784429446756549655gt102017Q12017Q22017Q32017Q490482660159195003936531226468855499268986388255841612510045272509943

Percent of Expenditures

11

CBO

Goods Largely Not Pro-Cyclical Except Food

Unemployment Gap

Lagged Inflation Constant Adjusted R2

PCE Durable Goods 008 028 -154 027(031) (001) (024)

PCE Motor Vehicles and Parts 031 030 -021 043(005) (000) (025)

PCE Video Audio Photo amp 016 060 -395 044 Information Processing Equipment amp Media (034) (000) (087)

PCE Other Durable Goods (including Medical Equipments) -010 038 -050 027(028) (000) (019)

PCE Nondurable Goods Less Energy -014 073 039 044(005) (000) (017)

PCE Food amp Beverage Purchased for Off-Premises Consumpt -024 066 071 055(004) (000) (024)

CPI-U Food at Home -027 063 082 052(005) (000) (028)

CPI-U Alcoholic Beverages -017 034 147 016(004) (000) (026)

PCE Pharmaceutical amp Other Medical Products -002 033 202 020(088) (000) (039)

PCE Other Nondurable Goods 008 025 000 042(046) (001) (018)

CPI-U Apparel 054 014 -069 022(000) (018) (030)

CPIU MicroPC - Gd

CPIU MicroPC - Sv

CPIU Components

CPIU MicroPC

Disaggregated PC Model

CPI and PCE weights

Dist of Price Changes (PCE)

lt02017Q12017Q22017Q32017Q42982879399018251530076497118373328794231576306846275112741969116890-22017Q12017Q22017Q32017Q4211846689120427351723027711342023221545531071181461218771897151376142-32017Q12017Q22017Q32017Q413958943933910467193842670834840815394970956904032747859413992923283-52017Q12017Q22017Q32017Q4176887169228583721572899097997604717537133523823844221799519998565525-102017Q12017Q22017Q32017Q482906102250864162821465544005778097459146483527973784429446756549655gt102017Q12017Q22017Q32017Q490482660159195003936531226468855499268986388255841612510045272509943

Percent of Expenditures

12

CBO

Servicesndash Prices are largely determined by domestic andor local factors

Household maintenance restaurants etcndash Cannot be inventoried

Goodsndash Lots of measurement issues and noise from one-off price shocks (Stock and

Watson 2018) Measurement issue very severe for apparel recreational goods financial

services etc One-off price shocks ldquocash for clunkersrdquo (2009) federal tobacco tax hike

(2009) ndash Tend to be more heavily influenced by long-run structural forces

Globalization Abdih et al (2016) and others ldquoThe Amazon effectrdquo Goolsbee and Klenow (2018) Increasing industrial concentration

Goods Versus Services Possible Explanations

13

CBO

Services Componentsndash Generally Phillips curve equations at the component level work relatively wellndash Special case PCE health care services (policy plays a large role)

CBOrsquos model incorporates CBOrsquos projection of Medicare reimbursement rate growth

Goods Componentsndash ldquoTop-down Approachrdquo CBO currently uses core PCE inflation (from the

aggregate Phillips curve) as an input in the equations for goods components Keep track of movements in relative prices Judgment in sector-specific trends Control for relative price of imports one-off price shocks etc

Forecasting Inflation at the Component Level

14

CBO

Modeling Inflation ExpectationsBackward-Looking Versus Anchored

15

CBO

Reduced-form

120587120587119905119905= 120630120630119860119860(119871119871)120587120587119905119905minus1 + (120783120783 minus 120630120630)120587120587lowast minus 120573120573 119880119880119905119905 minus 119880119880119905119905lowast + 120574120574119885119885119905119905 + 120598120598119905119905o 119860119860(119871119871)120587120587119905119905minus1 Use four lags of past inflationo 120587120587lowast Long-run inflationldquoanchorrdquoo 119880119880119905119905 minus 119880119880119905119905lowast The unemployment gap (CBOrsquos estimate)o 119885119885119905119905 Supply-side shocks including relative prices of imports and energy goodso Sample 1998Q1ndash2018Q3

Blanchard (2016) ldquoThe Phillips Curve Back to the rsquo60srdquo ndash Shows 120630120630 declined over time and is currently very small for headline CPI

But component-level analysis implies that the measure of inflation matters

This exercise Try ten different measures of aggregate inflation

Estimating the Aggregate Phillips Curve

16

CBO

Three measures of headline inflationndash Headline CPI-U (BLS) and Headline PCEPI (BEA) ndash Chained CPI-U (BLS)

Ten Measures of Inflation

17

CBO

Seven measures of core inflationndash Approach 1 Remove the most volatile price changes

XFE CPI-U (BLS) and XFE PCEPI (BEA) Median CPI-U and 16-Trimmed-Mean CPI-U (Federal Reserve Bank of

Cleveland) Rank price changes by size each month and trim the items with price

changes that are above or below a certain threshold ldquoMedianrdquo is just extreme trimming

Trimmed-Mean PCEPI (Federal Reserve Bank of Dallas) Trimming point chosen optimally every month

ndash Approach 2 Remove the most frequent price changes Sticky CPI-U and Sticky-XFE CPI (Federal Reserve Bank of Atlanta)

Price changes every 43 months or longer (Bils and Klenow 2004)

Ten Measures of Inflation (Continued)

18

CBO

Seven Measures of Core Inflation

19

CBO

Relative weight of lagged inflation and constantldquoanchorrdquondash Overall inflation 120572120572 asymp 02 consistent with Blanchard (2016) for headline CPI

Estimation Results I

This figure plots the sum of the estimated coefficients on lagged inflation terms using recursive samples that start in 1998Q1 and end in 2012Q1 2012Q2 hellip and 2018Q1 The Phillips curve equations are ldquounrestrictedrdquo as no assumption was imposed on the value of π before the estimation Instead the intercept of the equation which in theory equals απ was estimated and then the values of α and π were calculated by assuming the long-run restriction on the estimated coefficients

20

CBO

Relative weight of lagged inflation and constantldquoanchorrdquondash Overall inflation 120572120572 asymp 02 consistent with Blanchard (2016) for headline CPIndash Core inflation 120572120572 asymp 05 particularly for non-XFE measures

Estimation Results I (Continued)

This figure plots the sum of the estimated coefficients on lagged inflation terms using recursive samples that start in 1998Q1 and end in 2012Q1 2012Q2 hellip and 2018Q1 The Phillips curve equations are ldquounrestrictedrdquo as no assumption was imposed on the value of π before the estimation Instead the intercept of the equation which in theory equals απ was estimated and then the values of α and π were calculated by assuming the long-run restriction on the estimated coefficients

21

CBO

Further analysis using survey measures of inflation expectations suggests

Inflation expectations by consumers matter more for inflation dynamics than the expectations by professional forecasters for all ten measures of inflation

ndash Consumersrsquo expectations more closely resemble those of firms (Coibion and Gorodnichenko 2015)

ndash Transmission of professional forecastersrsquo views to consumers is weak in a low-inflation environment

ndash Coibion et al (2017) Similar finding for headline CPI

Long-run inflation expectations by consumers are ldquoshock-anchoredrdquo but not ldquolevel-anchoredrdquo (Ball and Mazumder 2011)

ndash Shock-anchoring Transitory shocks not passed to expectationsndash Level-anchoring Expectations tied to a particular level

Estimation Results I (Continued)

22

CBO

Comparing measures of core inflationndash The Phillips curve fits the non-XFE measures very well

Average adj 1198771198772 of non-XFE measures = 07 Ball and Mazumder (2014) Showed this for median CPI

ndash XFEs are ldquooutliersrdquo particularly XFE CPI-U (low 120572120572 and low 1198771198772) Average adj 1198771198772 of XFE measures = 025

Possible explanationndash Fewer goods prices in the non-XFE core measures

Goods price changes are more volatile Goods price changes occur more frequently

Estimation Results II

23

CBO

CPI Components Summary Statistics and Categorization

Mean Standard Deviation

Relative Importance

(2017)

Change in Relative

Importantce 2007-2017

XFE Sticky CPIProbability

(= Median CPI) (1998-2007)

(1) (2) (3) (4) (5) (6) (7)

Core (XFE) ServicesOwners Equivalent of Rent (OER) 27 11 232 298 Y Y 52Rent of Primary Residence 32 11 79 101 Y Y 5Medical Care Services 38 13 67 233 Y Y 2Education Services 49 15 30 058 Y Y 0Transportation Services 27 18 60 -105 Y Y 5

Core (XFE) GoodsApparel -03 25 31 -189 Y N 2New Vehicles 01 23 36 -142 Y N 3Used Cars and Trucks -03 8 21 020 Y N 0Medical Care Goods 29 16 18 059 Y Y 1

Food and EnergyFood away from Home 28 09 59 019 N Y 11Food at Home 21 27 77 -201 N N 6Energy 36 202 75 078 N N 1

CategorizationSummary Statistics

Major CPI Components

The categorization of components into sticky CPI is based on Bryan and Meyer (2010) ldquoAre Some Prices in the CPI More Forward Looking Than Others We Think Sordquo Economic Commentary Federal Reserve Bank of Cleveland httpswwwfrbatlantaorg-mediadocumentsresearchinflationprojectstickypricesticky-price-cpi-supplemental-readingpdf The probabilities of a componentrsquos being the median CPI are based on the ldquorevised methodologyrdquo that split the OER into four regional components For more detail see httpswwwclevelandfedorgenour-researchindicators-and-datamedian-cpirevised-methodologyaspx

CPIU MicroPC - Gd

CPIU MicroPC - Sv

CPIU Components

CPIU MicroPC

Disaggregated PC Model

CPI and PCE weights

Dist of Price Changes (PCE)

lt02017Q12017Q22017Q32017Q42982879399018251530076497118373328794231576306846275112741969116890-22017Q12017Q22017Q32017Q4211846689120427351723027711342023221545531071181461218771897151376142-32017Q12017Q22017Q32017Q413958943933910467193842670834840815394970956904032747859413992923283-52017Q12017Q22017Q32017Q4176887169228583721572899097997604717537133523823844221799519998565525-102017Q12017Q22017Q32017Q482906102250864162821465544005778097459146483527973784429446756549655gt102017Q12017Q22017Q32017Q490482660159195003936531226468855499268986388255841612510045272509943

Percent of Expenditures

24

CBO

The slope of the Phillips curve Flat but steeper for CPIs than PCEPIsndash 120573120573 = 005∿01 for PCEPIs but = 01∿02 for CPIsndash Why Shelter the most cyclically sensitive component has a much larger weight in CPI than in PCEPI

Estimation Results III

This figure plots the sum of the estimated coefficients on lagged inflation terms using recursive samples that start in 1998Q1 and end in 2012Q1 2012Q2 hellip and 2018Q1 The Phillips curve equations are ldquounrestrictedrdquo as no assumption was imposed on the value of π before the estimation Instead the intercept of the equation which in theory equals απ was estimated and then the values of α and π were calculated by assuming the long-run restriction on the estimated coefficients

25

CBO

The slope of the Phillips curve Flat but steeper for CPIs than PCEPIsndash 120573120573 = 005∿01 for PCEPIs but = 01∿02 for CPIsndash Why Shelter the most cyclically sensitive component has a much larger weight in CPI than in PCEPI

Estimation Results III (Continued)

This figure plots the sum of the estimated coefficients on lagged inflation terms using recursive samples that start in 1998Q1 and end in 2012Q1 2012Q2 hellip and 2018Q1 The Phillips curve equations are ldquounrestrictedrdquo as no assumption was imposed on the value of π before the estimation Instead an intercept of the equation which in theory equals απ was estimated and then the value of α and π were calculated by assuming the long-run restriction on the estimated coefficients

26

CBO

Reviewing the Findings

27

CBO

Phillips-curve analysis at the component level provides insight intondash Cyclical sensitivity of aggregate inflation

For most service components and food inflation process is pro-cyclical For most non-food good components inflation process is not pro-cyclical

Need better understanding and models for goods price inflationndash Difference in the behaviors of various inflation measures

CPI is more cyclically sensitive than PCEPI because shelter has larger share in CPI

Non-XFE measures of core inflation better capture movements in trend inflation because they contain fewer noisy goods components

The aggregate Phillips curve has shifted away from ldquoaccelerationistrdquo toward an ldquoanchoredrdquo form but the process appears incomplete

ndash Need better understanding of the formation process of inflation expectations particularly those of consumers and firms

Conclusions

28

CBO

Abdih Yasser Ravi Balakrishnan and Baoping Shang ldquoWhat Is Keeping US Core Inflation Low Insights From a Bottom-Up Approachrdquo International Monetary Fund 2016

Ball Laurence and Sandeep Mazumder ldquoInflation Dynamics and the Great Recessionrdquo Brookings Papers on Economic Activity (2011) 337ndash406

Blanchard Olivier ldquoThe Phillips Curve Back to the rsquo60s American Economic Review 1065 (2016) 31ndash34

Bils Mark and Peter J Klenow ldquoSome Evidence on the Importance of Sticky Pricesrdquo Journal of Political Economy 1125 (2004) 947ndash985

Coibion Olivier and Yuriy Gorodnichenko ldquoIs the Phillips Curve Alive and Well After All Inflation Expectations and the Missing Disinflationrdquo American Economic Journal Macroeconomics 71 (2015) 197ndash232

References

29

CBO

Coibion Olivier Yuriy Gorodnichenko and Rupal Kamdar ldquoThe Formation of Expectations Inflation and the Phillips Curverdquo No w23304 National Bureau of Economic Research 2017

Goolsbee Austan D and Peter J Klenow ldquoInternet Rising Prices Falling Measuring Inflation in a World of E-Commercerdquo AEA Papers and Proceedings Vol 108 2018

Stock J and Mark Watson ldquoSlack and Cyclically Sensitive Inflationrdquo ECB Forum on Central Banking Sintra Portugal 2018

Struyven Dann ldquoWhich Prices Still Respond to Slackrdquo Goldman Sachs Economics Research (October 31 2017)

References (Continued)

  • Inflation and the Phillips Curve
  • Inflation 1948ndash2018
  • Inflation Expectations 1948ndash2018
  • Unemployment 1948ndash2018
  • Structure of CBOrsquos Model for the Personal Consumption Expenditures (PCE) Price Index
  • Expectation-Augmented Phillips Curve
  • Slide Number 7
  • Phillips Curve Model at the Component Level
  • Shelter Inflation
  • Auto Inflation
  • Services Largely Pro-Cyclical
  • Goods Largely Not Pro-Cyclical Except Food
  • Goods Versus Services Possible Explanations
  • Forecasting Inflation at the Component Level
  • Slide Number 15
  • Estimating the Aggregate Phillips Curve
  • Ten Measures of Inflation
  • Ten Measures of Inflation (Continued)
  • Seven Measures of Core Inflation
  • Estimation Results I
  • Estimation Results I (Continued)
  • Estimation Results I (Continued)
  • Estimation Results II
  • CPI Components Summary Statistics and Categorization
  • Estimation Results III
  • Estimation Results III (Continued)
  • Slide Number 27
  • Conclusions
  • References
  • References (Continued)
Current vintage data
Dec-16 Jan-17 Feb-17 Mar-17 Apr-17 May-17 Jun-17 Jul-17 Aug-17 Sep-17 Oct-17 Nov-17 Dec-17
Rose at 0-2 rate 314 179 190 266 178 158 181 206 275 165 181 224 251
Rose at 2-3 rate 82 137 111 171 191 280 111 130 116 216 88 97 39
Rose at 3-5 rate 240 198 253 80 126 136 209 161 241 125 231 258 177
Rose at 5-10 rate 100 122 57 70 71 85 91 60 51 114 50 122 81
Rose faster than 10 rate 67 137 108 27 151 55 75 116 65 97 159 82 134
227 281 387 282 286 334 328 253 283 291 218 317
212 172 215455310712 218771897151
140 194 153949709569 74785941399
177 157 175371335238 221799519999
83 82 74591464835 84429446757
90 94 92689863883 125100452725
298 301 287942315763 275112741969
2017Q1 2017Q2 2017Q3 2017Q4
Fell 2983 3008 2879 2751
Rose at 0-2 rate 2118 1723 2155 2188
Rose at 2-3 rate 1396 1938 1539 748
Rose at 3-5 rate 1769 1573 1754 2218
Rose at 5-10 rate 829 821 746 844
Rose faster than 10 rate 905 937 927 1251
Major Sectors CPI PCEPI
Housing 426 183
Health Care 85 231
Food and Beverages 146 137
Transportation 153 90
Recreation 57 89
Education and Communication 70 46
Apparel 30 29
Financial Services 02 47
Other 30 147
Total 100 100
Data December 2016
Naiumlve Phillips-Curve-Style Models (Sample 1998-2017)
8 9 10 11
Variables Constant Lagged Inflation Unemployment Gap Adjusted R2 Order of AR Order of Lagged Rucgap
Owners Equivalent of Rent 118 062 -022 078 1 1
(48) (79) -(40)
Rent of Primary Residence 141 060 -018 084 1 4
(48) (74) -(33)
Medical Care Services 131 067 -007 032 2
(27) (58) -(09)
Education Services 023 095 -009 078 4 2
(07) (149) -(16)
Transportation Services 26 01 -00 018 1 3
(59) (05) -(02)
Apparel -060 027 043 016 4 0
-(19) (15) (23)
New Vehicles -046 003 065 018 1 0
-(17) (03) (39)
Used Cars and Trucks -001 031 092 028 2 4
-(00) (35) (19)
Medical Care Goods 23 02 -01 023 3
(51) (14) -(08)
Food away from Home 116 060 -008 050 1 2
(40) (62) -(15)
Food at Home 105 063 -009 059 1
(37) (86) -(07)
Energy 983 -022 -061 048 1
(48) -(22) -(06)
Unemployment Gap Lagged Inflation Constant Adjusted R2 Obs Durbin-Watson Statistic Order of Lagged Inflation Order of Lagged Unemployment Gap
Services
Owners Equivalent of Rent -021 062 113 078 83 171 1 1
000 000 024
Rent of Primary Residence -015 067 116 084 83 217 1 5
000 000 026
Food away from Home -008 061 108 057 83 251 2 2
007 000 025
Medical Care Services -005 070 115 034 83 201 2 0
051 000 045
Education Services -007 093 030 081 83 202 4 2
016 000 029
Transportation Services -002 -011 320 016 83 198 2 3
087 027 036
Goods
Apparel 050 010 -054 008 83 192 4 0
001 039 032
New Vehicles 038 002 -034 034 83 186 1 0
001 084 023
Used Cars and Trucks 038 018 -019 034 83 174 2 4
047 013 082
Food at Home -005 065 103 057 83 237 1 0
072 000 027
Medical Care Goods -005 046 169 056 83 196 3 0
053 000 028
Controlling Inflnm + Inflne
Unemployment Gap Lagged Inflation Constant Adjusted R2 Observations Durbin-Watson Statistic Order of Lagged Inflation Order of Lagged Unemployment Gap
Owners Equivalent of Rent (OER) -0212 0633 1120 077 80 179 1 1
(0058) (0082) (0260)
Rent of Primary Residence -0171 0604 1395 084 80 201 1 5
(0056) (0085) (0308)
Medical Care Services -0070 0693 1191 031 80 205 2 0
(0083) (0123) (0514)
Education Services -0087 0947 0296 078 80 204 4 2
(0055) (0067) (0354)
Transportation Services -0035 0154 2284 019 80 203 2 3
(0130) (0160) (0485)
Apparel 0416 0305 -0594 015 80 187 4 0
(0187) (0178) (0327)
New Vehicles 0655 0021 -0494 017 80 200 1 0
(0169) (0112) (0287)
Used Cars and Trucks 0410 0215 -0860 038 80 185 2 4
(0535) (0114) (0902)
Medical Care Goods -0082 0202 2251 022 80 192 3 0
(0105) (0141) (0458)
Food away from Home -0086 0613 1159 059 80 236 2 2
(0132) (0074) (0302)
Food at Home -0065 0751 0781 053 80 216 1 0
(0049) (0116) (0340)
Energy -0735 0068 2120 096 80 134 2 0
(0311) (0035) (0651)
Controlling Inflnm
Unemployment Gap Lagged Inflation Constant Adjusted R2 Observations Durbin-Watson Statistic Order of Lagged Inflation Order of Lagged Unemployment Gap
Core (XFE) Services
Owners Equivalent of Rent (OER) -0212 0632 1129 078 80 180 1 1
(0058) (0081) (0257)
Rent of Primary Residence -0171 0605 1393 084 80 201 1 5
(0055) (0084) (0302)
Medical Care Services -0068 0696 1189 032 80 205 2 0
(0082) (0122) (0511)
Education Services -0087 0943 0287 078 80 201 4 2
(0055) (0067) (0353)
Transportation Services -0030 0076 2602 017 80 202 2 3
(0131) (0152) (0440)
Apparel 0426 0292 -0544 016 80 189 4 0
(0186) (0176) (0315)
New Vehicles 0658 0023 -0436 017 80 196 1 0
(0168) (0112) (0272)
Used Cars and Trucks 0399 0190 -0322 036 80 171 2 4
(0543) (0115) (0861)
Medical Care Goods -0080 0203 2289 022 80 193 3 0
(0104) (0140) (0453)
Food away from Home -0090 0628 1038 059 80 237 2 2
(0132) (0073) (0282)
Food at Home -0064 0754 0741 053 80 216 1 0
(0049) (0116) (0338)
Energy -0678 -0305 10270 049 80 198 2 0
(1085) (0114) (2053)
Major CPI Components Summary Statistics Categorization
Mean Standard Deviation Relative Importance (2017) Change in Relative Importantce 2007-2017 XFE Sticky CPI Probability (= Median CPI) (1998-2007)
1 2 3 4 5 6 7
Core (XFE) Services
Owners Equivalent of Rent (OER) 27 11 232 298 Y Y 52
Rent of Primary Residence 32 11 79 101 Y Y 5
Medical Care Services 38 13 67 233 Y Y 2
Education Services 49 15 30 058 Y Y 0
Transportation Services 27 18 60 -105 Y Y 5
Core (XFE) Goods
Apparel -03 25 31 -189 Y N 2
New Vehicles 01 23 36 -142 Y N 3
Used Cars and Trucks -03 8 21 020 Y N 0
Medical Care Goods 29 16 18 059 Y Y 1
Food and Energy
Food away from Home 28 09 59 019 N Y 11
Food at Home 21 27 77 -201 N N 6
Energy 36 202 75 078 N N 1
Unemployment Gap Lagged Inflation Constant Adjusted R2 Observations Durbin-Watson Statistic
PCE Services Less Energy -014 032 191 046 83 185
(000) (001) (035)
PCE Housing Services -023 058 129 080 83 208
(000) (000) (024)
CPI-U Owners Equivalent of Rent -021 062 113 078 83 171
(000) (000) (024)
CPI-U Rent of Primary Residence -015 067 116 084 83 217
(000) (000) (026)
PCE Health Care Services -006 062 092 042 83 207
(038) (000) (026)
PCE Services Less Energy Rent of Shelter amp Health care -004 035 172 038 83 226
(050) (000) (028)
CPI-U Services Less Energy Services amp Rent of Shelter -015 040 188 034 83 218
(001) (000) (040)
CPI-U Medical Care Services -005 070 115 034 83 201
(051) (000) (045)
CPI-U Food away from Home -009 062 105 057 83 264
(005) (000) (025)
CPI-U Education Services -007 093 030 081 83 202
(016) (000) (029)
CPI-U Transportation Services -002 -011 320 016 83 198
(087) (027) (036)
Unemployment Gap Lagged Inflation Constant Adjusted R2 Observations Durbin-Watson Statistic
PCE Durable Goods 008 028 -154 027 83 183
(031) (001) (024)
PCE Motor Vehicles and Parts 031 030 -021 043 83 178
(005) (000) (025)
PCE Video Audio Photo amp 016 060 -395 044 83 222
Information Processing Equipment amp Media (034) (000) (087)
PCE Other Durable Goods (including Medical Equipments) -010 038 -050 027 83 188
(028) (000) (019)
PCE Nondurable Goods Less Energy -014 073 039 044 83 203
(005) (000) (017)
PCE Food amp Beverage Purchased for Off-Premises Consumption -024 066 071 055 83 226
(004) (000) (024)
CPI-U Food at Home -027 063 082 052 83 216
(005) (000) (028)
CPI-U Alcoholic Beverages -017 034 147 016 83 209
(004) (000) (026)
PCE Pharmaceutical amp Other Medical Products -002 033 202 020 83 173
(088) (000) (039)
PCE Other Nondurable Goods 008 025 000 042 83 179
(046) (001) (018)
CPI-U Apparel 054 014 -069 022 83 191
(000) (018) (030)
Current vintage data
Dec-16 Jan-17 Feb-17 Mar-17 Apr-17 May-17 Jun-17 Jul-17 Aug-17 Sep-17 Oct-17 Nov-17 Dec-17
Rose at 0-2 rate 314 179 190 266 178 158 181 206 275 165 181 224 251
Rose at 2-3 rate 82 137 111 171 191 280 111 130 116 216 88 97 39
Rose at 3-5 rate 240 198 253 80 126 136 209 161 241 125 231 258 177
Rose at 5-10 rate 100 122 57 70 71 85 91 60 51 114 50 122 81
Rose faster than 10 rate 67 137 108 27 151 55 75 116 65 97 159 82 134
227 281 387 282 286 334 328 253 283 291 218 317
212 172 215455310712 218771897151
140 194 153949709569 74785941399
177 157 175371335238 221799519999
83 82 74591464835 84429446757
90 94 92689863883 125100452725
298 301 287942315763 275112741969
2017Q1 2017Q2 2017Q3 2017Q4
Fell 2983 3008 2879 2751
Rose at 0-2 rate 2118 1723 2155 2188
Rose at 2-3 rate 1396 1938 1539 748
Rose at 3-5 rate 1769 1573 1754 2218
Rose at 5-10 rate 829 821 746 844
Rose faster than 10 rate 905 937 927 1251
Major Sectors CPI PCEPI
Housing 426 183
Health Care 85 231
Food and Beverages 146 137
Transportation 153 90
Recreation 57 89
Education and Communication 70 46
Apparel 30 29
Financial Services 02 47
Other 30 147
Total 100 100
Data December 2016
Naiumlve Phillips-Curve-Style Models (Sample 1998-2017)
8 9 10 11
Variables Constant Lagged Inflation Unemployment Gap Adjusted R2 Order of AR Order of Lagged Rucgap
Owners Equivalent of Rent 118 062 -022 078 1 1
(48) (79) -(40)
Rent of Primary Residence 141 060 -018 084 1 4
(48) (74) -(33)
Medical Care Services 131 067 -007 032 2
(27) (58) -(09)
Education Services 023 095 -009 078 4 2
(07) (149) -(16)
Transportation Services 26 01 -00 018 1 3
(59) (05) -(02)
Apparel -060 027 043 016 4 0
-(19) (15) (23)
New Vehicles -046 003 065 018 1 0
-(17) (03) (39)
Used Cars and Trucks -001 031 092 028 2 4
-(00) (35) (19)
Medical Care Goods 23 02 -01 023 3
(51) (14) -(08)
Food away from Home 116 060 -008 050 1 2
(40) (62) -(15)
Food at Home 105 063 -009 059 1
(37) (86) -(07)
Energy 983 -022 -061 048 1
(48) -(22) -(06)
Unemployment Gap Lagged Inflation Constant Adjusted R2 Obs Durbin-Watson Statistic Order of Lagged Inflation Order of Lagged Unemployment Gap
Services
Owners Equivalent of Rent -021 062 113 078 83 171 1 1
000 000 024
Rent of Primary Residence -015 067 116 084 83 217 1 5
000 000 026
Food away from Home -008 061 108 057 83 251 2 2
007 000 025
Medical Care Services -005 070 115 034 83 201 2 0
051 000 045
Education Services -007 093 030 081 83 202 4 2
016 000 029
Transportation Services -002 -011 320 016 83 198 2 3
087 027 036
Goods
Apparel 050 010 -054 008 83 192 4 0
001 039 032
New Vehicles 038 002 -034 034 83 186 1 0
001 084 023
Used Cars and Trucks 038 018 -019 034 83 174 2 4
047 013 082
Food at Home -005 065 103 057 83 237 1 0
072 000 027
Medical Care Goods -005 046 169 056 83 196 3 0
053 000 028
Controlling Inflnm + Inflne
Unemployment Gap Lagged Inflation Constant Adjusted R2 Observations Durbin-Watson Statistic Order of Lagged Inflation Order of Lagged Unemployment Gap
Owners Equivalent of Rent (OER) -0212 0633 1120 077 80 179 1 1
(0058) (0082) (0260)
Rent of Primary Residence -0171 0604 1395 084 80 201 1 5
(0056) (0085) (0308)
Medical Care Services -0070 0693 1191 031 80 205 2 0
(0083) (0123) (0514)
Education Services -0087 0947 0296 078 80 204 4 2
(0055) (0067) (0354)
Transportation Services -0035 0154 2284 019 80 203 2 3
(0130) (0160) (0485)
Apparel 0416 0305 -0594 015 80 187 4 0
(0187) (0178) (0327)
New Vehicles 0655 0021 -0494 017 80 200 1 0
(0169) (0112) (0287)
Used Cars and Trucks 0410 0215 -0860 038 80 185 2 4
(0535) (0114) (0902)
Medical Care Goods -0082 0202 2251 022 80 192 3 0
(0105) (0141) (0458)
Food away from Home -0086 0613 1159 059 80 236 2 2
(0132) (0074) (0302)
Food at Home -0065 0751 0781 053 80 216 1 0
(0049) (0116) (0340)
Energy -0735 0068 2120 096 80 134 2 0
(0311) (0035) (0651)
Controlling Inflnm
Unemployment Gap Lagged Inflation Constant Adjusted R2 Observations Durbin-Watson Statistic Order of Lagged Inflation Order of Lagged Unemployment Gap
Core (XFE) Services
Owners Equivalent of Rent (OER) -0212 0632 1129 078 80 180 1 1
(0058) (0081) (0257)
Rent of Primary Residence -0171 0605 1393 084 80 201 1 5
(0055) (0084) (0302)
Medical Care Services -0068 0696 1189 032 80 205 2 0
(0082) (0122) (0511)
Education Services -0087 0943 0287 078 80 201 4 2
(0055) (0067) (0353)
Transportation Services -0030 0076 2602 017 80 202 2 3
(0131) (0152) (0440)
Apparel 0426 0292 -0544 016 80 189 4 0
(0186) (0176) (0315)
New Vehicles 0658 0023 -0436 017 80 196 1 0
(0168) (0112) (0272)
Used Cars and Trucks 0399 0190 -0322 036 80 171 2 4
(0543) (0115) (0861)
Medical Care Goods -0080 0203 2289 022 80 193 3 0
(0104) (0140) (0453)
Food away from Home -0090 0628 1038 059 80 237 2 2
(0132) (0073) (0282)
Food at Home -0064 0754 0741 053 80 216 1 0
(0049) (0116) (0338)
Energy -0678 -0305 10270 049 80 198 2 0
(1085) (0114) (2053)
Major CPI Components Summary Statistics Categorization
Mean Standard Deviation Relative Importance (2017Q4) Change in Relative Importantce CPI Excluding Food and Energy Sticky CPI Probability (= Median CPI) (1998-2007)
1 2 3 4 5 6 7
Core (XFE) Services
Owners Equivalent of Rent (OER) 27 11 232 298 Y Y 52
Rent of Primary Residence 32 11 79 101 Y Y 5
Medical Care Services 38 13 67 233 Y Y 2
Education Services 49 15 30 058 Y Y 0
Transportation Services 27 18 60 -105 Y Y 5
Core (XFE) Goods
Apparel -03 25 31 -189 Y N 2
New Vehicles 01 23 36 -142 Y N 3
Used Cars and Trucks -03 8 21 020 Y N 0
Medical Care Goods 29 16 18 059 Y Y 1
Food and Energy
Food away from Home 28 09 59 019 N Y 11
Food at Home 21 27 77 -201 N N 6
Energy 36 202 75 078 N N 1
Unemployment Gap Lagged Inflation Constant Adjusted R2 Observations Durbin-Watson Statistic
PCE Services Less Energy -014 032 191 046 83 185
(000) (001) (035)
PCE Housing Services -023 058 129 080 83 208
(000) (000) (024)
CPI-U Owners Equivalent of Rent -021 062 113 078 83 171
(000) (000) (024)
CPI-U Rent of Primary Residence -015 067 116 084 83 217
(000) (000) (026)
PCE Health Care Services -006 062 092 042 83 207
(038) (000) (026)
PCE Services Less Energy Rent of Shelter amp Health care -004 035 172 038 83 226
(050) (000) (028)
CPI-U Services Less Energy Services amp Rent of Shelter -015 040 188 034 83 218
(001) (000) (040)
CPI-U Medical Care Services -005 070 115 034 83 201
(051) (000) (045)
CPI-U Food away from Home -009 062 105 057 83 264
(005) (000) (025)
CPI-U Education Services -007 093 030 081 83 202
(016) (000) (029)
CPI-U Transportation Services -002 -011 320 016 83 198
(087) (027) (036)
Unemployment Gap Lagged Inflation Constant Adjusted R2 Observations Durbin-Watson Statistic
PCE Durable Goods 008 028 -154 027 83 183
(031) (001) (024)
PCE Motor Vehicles and Parts 031 030 -021 043 83 178
(005) (000) (025)
PCE Video Audio Photo amp 016 060 -395 044 83 222
Information Processing Equipment amp Media (034) (000) (087)
PCE Other Durable Goods (including Medical Equipments) -010 038 -050 027 83 188
(028) (000) (019)
PCE Nondurable Goods Less Energy -014 073 039 044 83 203
(005) (000) (017)
PCE Food amp Beverage Purchased for Off-Premises Consumption -024 066 071 055 83 226
(004) (000) (024)
CPI-U Food at Home -027 063 082 052 83 216
(005) (000) (028)
CPI-U Alcoholic Beverages -017 034 147 016 83 209
(004) (000) (026)
PCE Pharmaceutical amp Other Medical Products -002 033 202 020 83 173
(088) (000) (039)
PCE Other Nondurable Goods 008 025 000 042 83 179
(046) (001) (018)
CPI-U Apparel 054 014 -069 022 83 191
(000) (018) (030)
Current vintage data
Dec-16 Jan-17 Feb-17 Mar-17 Apr-17 May-17 Jun-17 Jul-17 Aug-17 Sep-17 Oct-17 Nov-17 Dec-17
Rose at 0-2 rate 314 179 190 266 178 158 181 206 275 165 181 224 251
Rose at 2-3 rate 82 137 111 171 191 280 111 130 116 216 88 97 39
Rose at 3-5 rate 240 198 253 80 126 136 209 161 241 125 231 258 177
Rose at 5-10 rate 100 122 57 70 71 85 91 60 51 114 50 122 81
Rose faster than 10 rate 67 137 108 27 151 55 75 116 65 97 159 82 134
227 281 387 282 286 334 328 253 283 291 218 317
212 172 215455310712 218771897151
140 194 153949709569 74785941399
177 157 175371335238 221799519999
83 82 74591464835 84429446757
90 94 92689863883 125100452725
298 301 287942315763 275112741969
2017Q1 2017Q2 2017Q3 2017Q4
Fell 2983 3008 2879 2751
Rose at 0-2 rate 2118 1723 2155 2188
Rose at 2-3 rate 1396 1938 1539 748
Rose at 3-5 rate 1769 1573 1754 2218
Rose at 5-10 rate 829 821 746 844
Rose faster than 10 rate 905 937 927 1251
Major Sectors CPI PCEPI
Housing 426 183
Health Care 85 231
Food and Beverages 146 137
Transportation 153 90
Recreation 57 89
Education and Communication 70 46
Apparel 30 29
Financial Services 02 47
Other 30 147
Total 100 100
Data December 2016
Naiumlve Phillips-Curve-Style Models (Sample 1998-2017)
8 9 10 11
Variables Constant Lagged Inflation Unemployment Gap Adjusted R2 Order of AR Order of Lagged Rucgap
Owners Equivalent of Rent 118 062 -022 078 1 1
(48) (79) -(40)
Rent of Primary Residence 141 060 -018 084 1 4
(48) (74) -(33)
Medical Care Services 131 067 -007 032 2
(27) (58) -(09)
Education Services 023 095 -009 078 4 2
(07) (149) -(16)
Transportation Services 26 01 -00 018 1 3
(59) (05) -(02)
Apparel -060 027 043 016 4 0
-(19) (15) (23)
New Vehicles -046 003 065 018 1 0
-(17) (03) (39)
Used Cars and Trucks -001 031 092 028 2 4
-(00) (35) (19)
Medical Care Goods 23 02 -01 023 3
(51) (14) -(08)
Food away from Home 116 060 -008 050 1 2
(40) (62) -(15)
Food at Home 105 063 -009 059 1
(37) (86) -(07)
Energy 983 -022 -061 048 1
(48) -(22) -(06)
Unemployment Gap Lagged Inflation Constant Adjusted R2 Obs Durbin-Watson Statistic Order of Lagged Inflation Order of Lagged Unemployment Gap
Services
Owners Equivalent of Rent -021 062 113 078 83 171 1 1
000 000 024
Rent of Primary Residence -015 067 116 084 83 217 1 5
000 000 026
Food away from Home -008 061 108 057 83 251 2 2
007 000 025
Medical Care Services -005 070 115 034 83 201 2 0
051 000 045
Education Services -007 093 030 081 83 202 4 2
016 000 029
Transportation Services -002 -011 320 016 83 198 2 3
087 027 036
Goods
Apparel 050 010 -054 008 83 192 4 0
001 039 032
New Vehicles 038 002 -034 034 83 186 1 0
001 084 023
Used Cars and Trucks 038 018 -019 034 83 174 2 4
047 013 082
Food at Home -005 065 103 057 83 237 1 0
072 000 027
Medical Care Goods -005 046 169 056 83 196 3 0
053 000 028
Controlling Inflnm + Inflne
Unemployment Gap Lagged Inflation Constant Adjusted R2 Observations Durbin-Watson Statistic Order of Lagged Inflation Order of Lagged Unemployment Gap
Owners Equivalent of Rent (OER) -0212 0633 1120 077 80 179 1 1
(0058) (0082) (0260)
Rent of Primary Residence -0171 0604 1395 084 80 201 1 5
(0056) (0085) (0308)
Medical Care Services -0070 0693 1191 031 80 205 2 0
(0083) (0123) (0514)
Education Services -0087 0947 0296 078 80 204 4 2
(0055) (0067) (0354)
Transportation Services -0035 0154 2284 019 80 203 2 3
(0130) (0160) (0485)
Apparel 0416 0305 -0594 015 80 187 4 0
(0187) (0178) (0327)
New Vehicles 0655 0021 -0494 017 80 200 1 0
(0169) (0112) (0287)
Used Cars and Trucks 0410 0215 -0860 038 80 185 2 4
(0535) (0114) (0902)
Medical Care Goods -0082 0202 2251 022 80 192 3 0
(0105) (0141) (0458)
Food away from Home -0086 0613 1159 059 80 236 2 2
(0132) (0074) (0302)
Food at Home -0065 0751 0781 053 80 216 1 0
(0049) (0116) (0340)
Energy -0735 0068 2120 096 80 134 2 0
(0311) (0035) (0651)
Controlling Inflnm
Unemployment Gap Lagged Inflation Constant Adjusted R2 Observations Durbin-Watson Statistic Order of Lagged Inflation Order of Lagged Unemployment Gap
Core (XFE) Services
Owners Equivalent of Rent (OER) -0212 0632 1129 078 80 180 1 1
(0058) (0081) (0257)
Rent of Primary Residence -0171 0605 1393 084 80 201 1 5
(0055) (0084) (0302)
Medical Care Services -0068 0696 1189 032 80 205 2 0
(0082) (0122) (0511)
Education Services -0087 0943 0287 078 80 201 4 2
(0055) (0067) (0353)
Transportation Services -0030 0076 2602 017 80 202 2 3
(0131) (0152) (0440)
Apparel 0426 0292 -0544 016 80 189 4 0
(0186) (0176) (0315)
New Vehicles 0658 0023 -0436 017 80 196 1 0
(0168) (0112) (0272)
Used Cars and Trucks 0399 0190 -0322 036 80 171 2 4
(0543) (0115) (0861)
Medical Care Goods -0080 0203 2289 022 80 193 3 0
(0104) (0140) (0453)
Food away from Home -0090 0628 1038 059 80 237 2 2
(0132) (0073) (0282)
Food at Home -0064 0754 0741 053 80 216 1 0
(0049) (0116) (0338)
Energy -0678 -0305 10270 049 80 198 2 0
(1085) (0114) (2053)
Major CPI Components Summary Statistics Categorization
Mean Standard Deviation Relative Importance (2017Q4) Change in Relative Importantce CPI Excluding Food and Energy Sticky CPI Probability (= Median CPI) (1998-2007)
1 2 3 4 5 6 7
Core (XFE) Services
Owners Equivalent of Rent (OER) 27 11 232 298 Y Y 52
Rent of Primary Residence 32 11 79 101 Y Y 5
Medical Care Services 38 13 67 233 Y Y 2
Education Services 49 15 30 058 Y Y 0
Transportation Services 27 18 60 -105 Y Y 5
Core (XFE) Goods
Apparel -03 25 31 -189 Y N 2
New Vehicles 01 23 36 -142 Y N 3
Used Cars and Trucks -03 8 21 020 Y N 0
Medical Care Goods 29 16 18 059 Y Y 1
Food and Energy
Food away from Home 28 09 59 019 N Y 11
Food at Home 21 27 77 -201 N N 6
Energy 36 202 75 078 N N 1
Unemployment Gap Lagged Inflation Constant Adjusted R2 Observations Durbin-Watson Statistic
PCE Services Less Energy -014 032 191 046 83 185
(000) (001) (035)
PCE Housing Services -023 058 129 080 83 208
(000) (000) (024)
CPI-U Owners Equivalent of Rent -021 062 113 078 83 171
(000) (000) (024)
CPI-U Rent of Primary Residence -015 067 116 084 83 217
(000) (000) (026)
PCE Health Care Services -006 062 092 042 83 207
(038) (000) (026)
PCE Services Less Energy Rent of Shelter amp Health care -004 035 172 038 83 226
(050) (000) (028)
CPI-U Services Less Energy Services amp Rent of Shelter -015 040 188 034 83 218
(001) (000) (040)
CPI-U Medical Care Services -005 070 115 034 83 201
(051) (000) (045)
CPI-U Food away from Home -009 062 105 057 83 264
(005) (000) (025)
CPI-U Education Services -007 093 030 081 83 202
(016) (000) (029)
CPI-U Transportation Services -002 -011 320 016 83 198
(087) (027) (036)
Unemployment Gap Lagged Inflation Constant Adjusted R2 Observations Durbin-Watson Statistic
PCE Durable Goods 008 028 -154 027 83 183
(031) (001) (024)
PCE Motor Vehicles and Parts 031 030 -021 043 83 178
(005) (000) (025)
PCE Video Audio Photo amp 016 060 -395 044 83 222
Information Processing Equipment amp Media (034) (000) (087)
PCE Other Durable Goods (including Medical Equipments) -010 038 -050 027 83 188
(028) (000) (019)
PCE Nondurable Goods Less Energy -014 073 039 044 83 203
(005) (000) (017)
PCE Food amp Beverage Purchased for Off-Premises Consumption -024 066 071 055 83 226
(004) (000) (024)
CPI-U Food at Home -027 063 082 052 83 216
(005) (000) (028)
CPI-U Alcoholic Beverages -017 034 147 016 83 209
(004) (000) (026)
PCE Pharmaceutical amp Other Medical Products -002 033 202 020 83 173
(088) (000) (039)
PCE Other Nondurable Goods 008 025 000 042 83 179
(046) (001) (018)
CPI-U Apparel 054 014 -069 022 83 191
(000) (018) (030)
Page 6: Inflation and the Phillips Curve · Phillips curve is so flat Method: Estimating Phillips curve equations at the component level – Measure of slack: The unemployment gap (CBO’s

5

CBO

120587120587119905119905= 119864119864119905119905120587120587119905119905+1 minus 120631120631 119880119880119905119905 minus 119880119880lowast + 120574120574119885119885119905119905 + 120598120598119905119905

Determinants of inflationndash 119864119864119905119905120587120587119905119905+1 Inflation expectationsndash 120573120573 119880119880119905119905 minus 119880119880lowast Unemployment gap or other measures of slack in the economyndash 120574120574119885119885119905119905 Supply-side shocks (for example relative price of imports energy etc)

Issue 1 Cyclical sensitivity of inflationndash For the price index of personal consumption expenditures (PCEPI) excluding food

and energy (ldquoXFErdquo or ldquocore-XFErdquo) 120573120573 has declined from 03~04 in the 1970s to 005~01 in the most recent decades

ndash Does inflation still respond to slack

Issue 2 The form of inflation expectationsndash ldquoAccelerationistrdquo 119864119864119905119905120587120587119905119905+1= 119860119860 119871119871 120587120587119905119905minus1 (distributed lags of inflation)ndash ldquoAnchoredrdquo 119864119864119905119905120587120587119905119905+1= 120587120587lowast (constant)ndash Combined 119864119864119905119905120587120587119905119905+1=120630120630119860119860(119871119871)120587120587119905119905minus1 + (120783120783 minus 120630120630)120587120587lowast

Expectation-Augmented Phillips Curve

6

CBO

Cyclical Sensitivity of InflationGoods Versus Services

7

CBO

Goal Understanding why the aggregate Phillips curve is so flat

Method Estimating Phillips curve equations at the component levelndash Measure of slack The unemployment gap (CBOrsquos estimate)ndash Sample 1998Q1ndash2018Q3 (stable inflation expectations)ndash Control for Relative price of imports and energy goods outliers (for example ldquocash

for clunkersrdquo)ndash Similar to Stock and Watson (2018) Struyven (2017)

Main Finding Divergence between goods and services in terms of cyclical sensitivity

ndash Services Remained largely pro-cyclicalmdashfor example shelterndash Goods Not pro-cyclical in the past two decades

Dampening the slope of the aggregate Phillips curve Exception Food prices

Phillips Curve Model at the Component Level

8

CBO

Shelter Inflation

9

CBO

Auto Inflation

10

CBO

Services Largely Pro-Cyclical

Unemployment Gap

Lagged Inflation Constant Adjusted R2

PCE Services Less Energy -014 032 191 046(000) (001) (035)

PCE Housing Services -023 058 129 080(000) (000) (024)

CPI-U Owners Equivalent of Rent -021 062 113 078(000) (000) (024)

CPI-U Rent of Primary Residence -015 067 116 084(000) (000) (026)

PCE Health Care Services -006 062 092 042(038) (000) (026)

PCE Services Less Energy Rent of Shelter amp Health care -004 035 172 038(050) (000) (028)

CPI-U Services Less Energy Services amp Rent of Shelter -015 040 188 034(001) (000) (040)

CPI-U Medical Care Services -005 070 115 034(051) (000) (045)

CPI-U Food away from Home -009 062 105 057(005) (000) (025)

CPI-U Education Services -007 093 030 081(016) (000) (029)

CPI-U Transportation Services -002 -011 320 016(087) (027) (036)

CPIU MicroPC - Gd

CPIU MicroPC - Sv

CPIU Components

CPIU MicroPC

Disaggregated PC Model

CPI and PCE weights

Dist of Price Changes (PCE)

lt02017Q12017Q22017Q32017Q42982879399018251530076497118373328794231576306846275112741969116890-22017Q12017Q22017Q32017Q4211846689120427351723027711342023221545531071181461218771897151376142-32017Q12017Q22017Q32017Q413958943933910467193842670834840815394970956904032747859413992923283-52017Q12017Q22017Q32017Q4176887169228583721572899097997604717537133523823844221799519998565525-102017Q12017Q22017Q32017Q482906102250864162821465544005778097459146483527973784429446756549655gt102017Q12017Q22017Q32017Q490482660159195003936531226468855499268986388255841612510045272509943

Percent of Expenditures

11

CBO

Goods Largely Not Pro-Cyclical Except Food

Unemployment Gap

Lagged Inflation Constant Adjusted R2

PCE Durable Goods 008 028 -154 027(031) (001) (024)

PCE Motor Vehicles and Parts 031 030 -021 043(005) (000) (025)

PCE Video Audio Photo amp 016 060 -395 044 Information Processing Equipment amp Media (034) (000) (087)

PCE Other Durable Goods (including Medical Equipments) -010 038 -050 027(028) (000) (019)

PCE Nondurable Goods Less Energy -014 073 039 044(005) (000) (017)

PCE Food amp Beverage Purchased for Off-Premises Consumpt -024 066 071 055(004) (000) (024)

CPI-U Food at Home -027 063 082 052(005) (000) (028)

CPI-U Alcoholic Beverages -017 034 147 016(004) (000) (026)

PCE Pharmaceutical amp Other Medical Products -002 033 202 020(088) (000) (039)

PCE Other Nondurable Goods 008 025 000 042(046) (001) (018)

CPI-U Apparel 054 014 -069 022(000) (018) (030)

CPIU MicroPC - Gd

CPIU MicroPC - Sv

CPIU Components

CPIU MicroPC

Disaggregated PC Model

CPI and PCE weights

Dist of Price Changes (PCE)

lt02017Q12017Q22017Q32017Q42982879399018251530076497118373328794231576306846275112741969116890-22017Q12017Q22017Q32017Q4211846689120427351723027711342023221545531071181461218771897151376142-32017Q12017Q22017Q32017Q413958943933910467193842670834840815394970956904032747859413992923283-52017Q12017Q22017Q32017Q4176887169228583721572899097997604717537133523823844221799519998565525-102017Q12017Q22017Q32017Q482906102250864162821465544005778097459146483527973784429446756549655gt102017Q12017Q22017Q32017Q490482660159195003936531226468855499268986388255841612510045272509943

Percent of Expenditures

12

CBO

Servicesndash Prices are largely determined by domestic andor local factors

Household maintenance restaurants etcndash Cannot be inventoried

Goodsndash Lots of measurement issues and noise from one-off price shocks (Stock and

Watson 2018) Measurement issue very severe for apparel recreational goods financial

services etc One-off price shocks ldquocash for clunkersrdquo (2009) federal tobacco tax hike

(2009) ndash Tend to be more heavily influenced by long-run structural forces

Globalization Abdih et al (2016) and others ldquoThe Amazon effectrdquo Goolsbee and Klenow (2018) Increasing industrial concentration

Goods Versus Services Possible Explanations

13

CBO

Services Componentsndash Generally Phillips curve equations at the component level work relatively wellndash Special case PCE health care services (policy plays a large role)

CBOrsquos model incorporates CBOrsquos projection of Medicare reimbursement rate growth

Goods Componentsndash ldquoTop-down Approachrdquo CBO currently uses core PCE inflation (from the

aggregate Phillips curve) as an input in the equations for goods components Keep track of movements in relative prices Judgment in sector-specific trends Control for relative price of imports one-off price shocks etc

Forecasting Inflation at the Component Level

14

CBO

Modeling Inflation ExpectationsBackward-Looking Versus Anchored

15

CBO

Reduced-form

120587120587119905119905= 120630120630119860119860(119871119871)120587120587119905119905minus1 + (120783120783 minus 120630120630)120587120587lowast minus 120573120573 119880119880119905119905 minus 119880119880119905119905lowast + 120574120574119885119885119905119905 + 120598120598119905119905o 119860119860(119871119871)120587120587119905119905minus1 Use four lags of past inflationo 120587120587lowast Long-run inflationldquoanchorrdquoo 119880119880119905119905 minus 119880119880119905119905lowast The unemployment gap (CBOrsquos estimate)o 119885119885119905119905 Supply-side shocks including relative prices of imports and energy goodso Sample 1998Q1ndash2018Q3

Blanchard (2016) ldquoThe Phillips Curve Back to the rsquo60srdquo ndash Shows 120630120630 declined over time and is currently very small for headline CPI

But component-level analysis implies that the measure of inflation matters

This exercise Try ten different measures of aggregate inflation

Estimating the Aggregate Phillips Curve

16

CBO

Three measures of headline inflationndash Headline CPI-U (BLS) and Headline PCEPI (BEA) ndash Chained CPI-U (BLS)

Ten Measures of Inflation

17

CBO

Seven measures of core inflationndash Approach 1 Remove the most volatile price changes

XFE CPI-U (BLS) and XFE PCEPI (BEA) Median CPI-U and 16-Trimmed-Mean CPI-U (Federal Reserve Bank of

Cleveland) Rank price changes by size each month and trim the items with price

changes that are above or below a certain threshold ldquoMedianrdquo is just extreme trimming

Trimmed-Mean PCEPI (Federal Reserve Bank of Dallas) Trimming point chosen optimally every month

ndash Approach 2 Remove the most frequent price changes Sticky CPI-U and Sticky-XFE CPI (Federal Reserve Bank of Atlanta)

Price changes every 43 months or longer (Bils and Klenow 2004)

Ten Measures of Inflation (Continued)

18

CBO

Seven Measures of Core Inflation

19

CBO

Relative weight of lagged inflation and constantldquoanchorrdquondash Overall inflation 120572120572 asymp 02 consistent with Blanchard (2016) for headline CPI

Estimation Results I

This figure plots the sum of the estimated coefficients on lagged inflation terms using recursive samples that start in 1998Q1 and end in 2012Q1 2012Q2 hellip and 2018Q1 The Phillips curve equations are ldquounrestrictedrdquo as no assumption was imposed on the value of π before the estimation Instead the intercept of the equation which in theory equals απ was estimated and then the values of α and π were calculated by assuming the long-run restriction on the estimated coefficients

20

CBO

Relative weight of lagged inflation and constantldquoanchorrdquondash Overall inflation 120572120572 asymp 02 consistent with Blanchard (2016) for headline CPIndash Core inflation 120572120572 asymp 05 particularly for non-XFE measures

Estimation Results I (Continued)

This figure plots the sum of the estimated coefficients on lagged inflation terms using recursive samples that start in 1998Q1 and end in 2012Q1 2012Q2 hellip and 2018Q1 The Phillips curve equations are ldquounrestrictedrdquo as no assumption was imposed on the value of π before the estimation Instead the intercept of the equation which in theory equals απ was estimated and then the values of α and π were calculated by assuming the long-run restriction on the estimated coefficients

21

CBO

Further analysis using survey measures of inflation expectations suggests

Inflation expectations by consumers matter more for inflation dynamics than the expectations by professional forecasters for all ten measures of inflation

ndash Consumersrsquo expectations more closely resemble those of firms (Coibion and Gorodnichenko 2015)

ndash Transmission of professional forecastersrsquo views to consumers is weak in a low-inflation environment

ndash Coibion et al (2017) Similar finding for headline CPI

Long-run inflation expectations by consumers are ldquoshock-anchoredrdquo but not ldquolevel-anchoredrdquo (Ball and Mazumder 2011)

ndash Shock-anchoring Transitory shocks not passed to expectationsndash Level-anchoring Expectations tied to a particular level

Estimation Results I (Continued)

22

CBO

Comparing measures of core inflationndash The Phillips curve fits the non-XFE measures very well

Average adj 1198771198772 of non-XFE measures = 07 Ball and Mazumder (2014) Showed this for median CPI

ndash XFEs are ldquooutliersrdquo particularly XFE CPI-U (low 120572120572 and low 1198771198772) Average adj 1198771198772 of XFE measures = 025

Possible explanationndash Fewer goods prices in the non-XFE core measures

Goods price changes are more volatile Goods price changes occur more frequently

Estimation Results II

23

CBO

CPI Components Summary Statistics and Categorization

Mean Standard Deviation

Relative Importance

(2017)

Change in Relative

Importantce 2007-2017

XFE Sticky CPIProbability

(= Median CPI) (1998-2007)

(1) (2) (3) (4) (5) (6) (7)

Core (XFE) ServicesOwners Equivalent of Rent (OER) 27 11 232 298 Y Y 52Rent of Primary Residence 32 11 79 101 Y Y 5Medical Care Services 38 13 67 233 Y Y 2Education Services 49 15 30 058 Y Y 0Transportation Services 27 18 60 -105 Y Y 5

Core (XFE) GoodsApparel -03 25 31 -189 Y N 2New Vehicles 01 23 36 -142 Y N 3Used Cars and Trucks -03 8 21 020 Y N 0Medical Care Goods 29 16 18 059 Y Y 1

Food and EnergyFood away from Home 28 09 59 019 N Y 11Food at Home 21 27 77 -201 N N 6Energy 36 202 75 078 N N 1

CategorizationSummary Statistics

Major CPI Components

The categorization of components into sticky CPI is based on Bryan and Meyer (2010) ldquoAre Some Prices in the CPI More Forward Looking Than Others We Think Sordquo Economic Commentary Federal Reserve Bank of Cleveland httpswwwfrbatlantaorg-mediadocumentsresearchinflationprojectstickypricesticky-price-cpi-supplemental-readingpdf The probabilities of a componentrsquos being the median CPI are based on the ldquorevised methodologyrdquo that split the OER into four regional components For more detail see httpswwwclevelandfedorgenour-researchindicators-and-datamedian-cpirevised-methodologyaspx

CPIU MicroPC - Gd

CPIU MicroPC - Sv

CPIU Components

CPIU MicroPC

Disaggregated PC Model

CPI and PCE weights

Dist of Price Changes (PCE)

lt02017Q12017Q22017Q32017Q42982879399018251530076497118373328794231576306846275112741969116890-22017Q12017Q22017Q32017Q4211846689120427351723027711342023221545531071181461218771897151376142-32017Q12017Q22017Q32017Q413958943933910467193842670834840815394970956904032747859413992923283-52017Q12017Q22017Q32017Q4176887169228583721572899097997604717537133523823844221799519998565525-102017Q12017Q22017Q32017Q482906102250864162821465544005778097459146483527973784429446756549655gt102017Q12017Q22017Q32017Q490482660159195003936531226468855499268986388255841612510045272509943

Percent of Expenditures

24

CBO

The slope of the Phillips curve Flat but steeper for CPIs than PCEPIsndash 120573120573 = 005∿01 for PCEPIs but = 01∿02 for CPIsndash Why Shelter the most cyclically sensitive component has a much larger weight in CPI than in PCEPI

Estimation Results III

This figure plots the sum of the estimated coefficients on lagged inflation terms using recursive samples that start in 1998Q1 and end in 2012Q1 2012Q2 hellip and 2018Q1 The Phillips curve equations are ldquounrestrictedrdquo as no assumption was imposed on the value of π before the estimation Instead the intercept of the equation which in theory equals απ was estimated and then the values of α and π were calculated by assuming the long-run restriction on the estimated coefficients

25

CBO

The slope of the Phillips curve Flat but steeper for CPIs than PCEPIsndash 120573120573 = 005∿01 for PCEPIs but = 01∿02 for CPIsndash Why Shelter the most cyclically sensitive component has a much larger weight in CPI than in PCEPI

Estimation Results III (Continued)

This figure plots the sum of the estimated coefficients on lagged inflation terms using recursive samples that start in 1998Q1 and end in 2012Q1 2012Q2 hellip and 2018Q1 The Phillips curve equations are ldquounrestrictedrdquo as no assumption was imposed on the value of π before the estimation Instead an intercept of the equation which in theory equals απ was estimated and then the value of α and π were calculated by assuming the long-run restriction on the estimated coefficients

26

CBO

Reviewing the Findings

27

CBO

Phillips-curve analysis at the component level provides insight intondash Cyclical sensitivity of aggregate inflation

For most service components and food inflation process is pro-cyclical For most non-food good components inflation process is not pro-cyclical

Need better understanding and models for goods price inflationndash Difference in the behaviors of various inflation measures

CPI is more cyclically sensitive than PCEPI because shelter has larger share in CPI

Non-XFE measures of core inflation better capture movements in trend inflation because they contain fewer noisy goods components

The aggregate Phillips curve has shifted away from ldquoaccelerationistrdquo toward an ldquoanchoredrdquo form but the process appears incomplete

ndash Need better understanding of the formation process of inflation expectations particularly those of consumers and firms

Conclusions

28

CBO

Abdih Yasser Ravi Balakrishnan and Baoping Shang ldquoWhat Is Keeping US Core Inflation Low Insights From a Bottom-Up Approachrdquo International Monetary Fund 2016

Ball Laurence and Sandeep Mazumder ldquoInflation Dynamics and the Great Recessionrdquo Brookings Papers on Economic Activity (2011) 337ndash406

Blanchard Olivier ldquoThe Phillips Curve Back to the rsquo60s American Economic Review 1065 (2016) 31ndash34

Bils Mark and Peter J Klenow ldquoSome Evidence on the Importance of Sticky Pricesrdquo Journal of Political Economy 1125 (2004) 947ndash985

Coibion Olivier and Yuriy Gorodnichenko ldquoIs the Phillips Curve Alive and Well After All Inflation Expectations and the Missing Disinflationrdquo American Economic Journal Macroeconomics 71 (2015) 197ndash232

References

29

CBO

Coibion Olivier Yuriy Gorodnichenko and Rupal Kamdar ldquoThe Formation of Expectations Inflation and the Phillips Curverdquo No w23304 National Bureau of Economic Research 2017

Goolsbee Austan D and Peter J Klenow ldquoInternet Rising Prices Falling Measuring Inflation in a World of E-Commercerdquo AEA Papers and Proceedings Vol 108 2018

Stock J and Mark Watson ldquoSlack and Cyclically Sensitive Inflationrdquo ECB Forum on Central Banking Sintra Portugal 2018

Struyven Dann ldquoWhich Prices Still Respond to Slackrdquo Goldman Sachs Economics Research (October 31 2017)

References (Continued)

  • Inflation and the Phillips Curve
  • Inflation 1948ndash2018
  • Inflation Expectations 1948ndash2018
  • Unemployment 1948ndash2018
  • Structure of CBOrsquos Model for the Personal Consumption Expenditures (PCE) Price Index
  • Expectation-Augmented Phillips Curve
  • Slide Number 7
  • Phillips Curve Model at the Component Level
  • Shelter Inflation
  • Auto Inflation
  • Services Largely Pro-Cyclical
  • Goods Largely Not Pro-Cyclical Except Food
  • Goods Versus Services Possible Explanations
  • Forecasting Inflation at the Component Level
  • Slide Number 15
  • Estimating the Aggregate Phillips Curve
  • Ten Measures of Inflation
  • Ten Measures of Inflation (Continued)
  • Seven Measures of Core Inflation
  • Estimation Results I
  • Estimation Results I (Continued)
  • Estimation Results I (Continued)
  • Estimation Results II
  • CPI Components Summary Statistics and Categorization
  • Estimation Results III
  • Estimation Results III (Continued)
  • Slide Number 27
  • Conclusions
  • References
  • References (Continued)
Current vintage data
Dec-16 Jan-17 Feb-17 Mar-17 Apr-17 May-17 Jun-17 Jul-17 Aug-17 Sep-17 Oct-17 Nov-17 Dec-17
Rose at 0-2 rate 314 179 190 266 178 158 181 206 275 165 181 224 251
Rose at 2-3 rate 82 137 111 171 191 280 111 130 116 216 88 97 39
Rose at 3-5 rate 240 198 253 80 126 136 209 161 241 125 231 258 177
Rose at 5-10 rate 100 122 57 70 71 85 91 60 51 114 50 122 81
Rose faster than 10 rate 67 137 108 27 151 55 75 116 65 97 159 82 134
227 281 387 282 286 334 328 253 283 291 218 317
212 172 215455310712 218771897151
140 194 153949709569 74785941399
177 157 175371335238 221799519999
83 82 74591464835 84429446757
90 94 92689863883 125100452725
298 301 287942315763 275112741969
2017Q1 2017Q2 2017Q3 2017Q4
Fell 2983 3008 2879 2751
Rose at 0-2 rate 2118 1723 2155 2188
Rose at 2-3 rate 1396 1938 1539 748
Rose at 3-5 rate 1769 1573 1754 2218
Rose at 5-10 rate 829 821 746 844
Rose faster than 10 rate 905 937 927 1251
Major Sectors CPI PCEPI
Housing 426 183
Health Care 85 231
Food and Beverages 146 137
Transportation 153 90
Recreation 57 89
Education and Communication 70 46
Apparel 30 29
Financial Services 02 47
Other 30 147
Total 100 100
Data December 2016
Naiumlve Phillips-Curve-Style Models (Sample 1998-2017)
8 9 10 11
Variables Constant Lagged Inflation Unemployment Gap Adjusted R2 Order of AR Order of Lagged Rucgap
Owners Equivalent of Rent 118 062 -022 078 1 1
(48) (79) -(40)
Rent of Primary Residence 141 060 -018 084 1 4
(48) (74) -(33)
Medical Care Services 131 067 -007 032 2
(27) (58) -(09)
Education Services 023 095 -009 078 4 2
(07) (149) -(16)
Transportation Services 26 01 -00 018 1 3
(59) (05) -(02)
Apparel -060 027 043 016 4 0
-(19) (15) (23)
New Vehicles -046 003 065 018 1 0
-(17) (03) (39)
Used Cars and Trucks -001 031 092 028 2 4
-(00) (35) (19)
Medical Care Goods 23 02 -01 023 3
(51) (14) -(08)
Food away from Home 116 060 -008 050 1 2
(40) (62) -(15)
Food at Home 105 063 -009 059 1
(37) (86) -(07)
Energy 983 -022 -061 048 1
(48) -(22) -(06)
Unemployment Gap Lagged Inflation Constant Adjusted R2 Obs Durbin-Watson Statistic Order of Lagged Inflation Order of Lagged Unemployment Gap
Services
Owners Equivalent of Rent -021 062 113 078 83 171 1 1
000 000 024
Rent of Primary Residence -015 067 116 084 83 217 1 5
000 000 026
Food away from Home -008 061 108 057 83 251 2 2
007 000 025
Medical Care Services -005 070 115 034 83 201 2 0
051 000 045
Education Services -007 093 030 081 83 202 4 2
016 000 029
Transportation Services -002 -011 320 016 83 198 2 3
087 027 036
Goods
Apparel 050 010 -054 008 83 192 4 0
001 039 032
New Vehicles 038 002 -034 034 83 186 1 0
001 084 023
Used Cars and Trucks 038 018 -019 034 83 174 2 4
047 013 082
Food at Home -005 065 103 057 83 237 1 0
072 000 027
Medical Care Goods -005 046 169 056 83 196 3 0
053 000 028
Controlling Inflnm + Inflne
Unemployment Gap Lagged Inflation Constant Adjusted R2 Observations Durbin-Watson Statistic Order of Lagged Inflation Order of Lagged Unemployment Gap
Owners Equivalent of Rent (OER) -0212 0633 1120 077 80 179 1 1
(0058) (0082) (0260)
Rent of Primary Residence -0171 0604 1395 084 80 201 1 5
(0056) (0085) (0308)
Medical Care Services -0070 0693 1191 031 80 205 2 0
(0083) (0123) (0514)
Education Services -0087 0947 0296 078 80 204 4 2
(0055) (0067) (0354)
Transportation Services -0035 0154 2284 019 80 203 2 3
(0130) (0160) (0485)
Apparel 0416 0305 -0594 015 80 187 4 0
(0187) (0178) (0327)
New Vehicles 0655 0021 -0494 017 80 200 1 0
(0169) (0112) (0287)
Used Cars and Trucks 0410 0215 -0860 038 80 185 2 4
(0535) (0114) (0902)
Medical Care Goods -0082 0202 2251 022 80 192 3 0
(0105) (0141) (0458)
Food away from Home -0086 0613 1159 059 80 236 2 2
(0132) (0074) (0302)
Food at Home -0065 0751 0781 053 80 216 1 0
(0049) (0116) (0340)
Energy -0735 0068 2120 096 80 134 2 0
(0311) (0035) (0651)
Controlling Inflnm
Unemployment Gap Lagged Inflation Constant Adjusted R2 Observations Durbin-Watson Statistic Order of Lagged Inflation Order of Lagged Unemployment Gap
Core (XFE) Services
Owners Equivalent of Rent (OER) -0212 0632 1129 078 80 180 1 1
(0058) (0081) (0257)
Rent of Primary Residence -0171 0605 1393 084 80 201 1 5
(0055) (0084) (0302)
Medical Care Services -0068 0696 1189 032 80 205 2 0
(0082) (0122) (0511)
Education Services -0087 0943 0287 078 80 201 4 2
(0055) (0067) (0353)
Transportation Services -0030 0076 2602 017 80 202 2 3
(0131) (0152) (0440)
Apparel 0426 0292 -0544 016 80 189 4 0
(0186) (0176) (0315)
New Vehicles 0658 0023 -0436 017 80 196 1 0
(0168) (0112) (0272)
Used Cars and Trucks 0399 0190 -0322 036 80 171 2 4
(0543) (0115) (0861)
Medical Care Goods -0080 0203 2289 022 80 193 3 0
(0104) (0140) (0453)
Food away from Home -0090 0628 1038 059 80 237 2 2
(0132) (0073) (0282)
Food at Home -0064 0754 0741 053 80 216 1 0
(0049) (0116) (0338)
Energy -0678 -0305 10270 049 80 198 2 0
(1085) (0114) (2053)
Major CPI Components Summary Statistics Categorization
Mean Standard Deviation Relative Importance (2017) Change in Relative Importantce 2007-2017 XFE Sticky CPI Probability (= Median CPI) (1998-2007)
1 2 3 4 5 6 7
Core (XFE) Services
Owners Equivalent of Rent (OER) 27 11 232 298 Y Y 52
Rent of Primary Residence 32 11 79 101 Y Y 5
Medical Care Services 38 13 67 233 Y Y 2
Education Services 49 15 30 058 Y Y 0
Transportation Services 27 18 60 -105 Y Y 5
Core (XFE) Goods
Apparel -03 25 31 -189 Y N 2
New Vehicles 01 23 36 -142 Y N 3
Used Cars and Trucks -03 8 21 020 Y N 0
Medical Care Goods 29 16 18 059 Y Y 1
Food and Energy
Food away from Home 28 09 59 019 N Y 11
Food at Home 21 27 77 -201 N N 6
Energy 36 202 75 078 N N 1
Unemployment Gap Lagged Inflation Constant Adjusted R2 Observations Durbin-Watson Statistic
PCE Services Less Energy -014 032 191 046 83 185
(000) (001) (035)
PCE Housing Services -023 058 129 080 83 208
(000) (000) (024)
CPI-U Owners Equivalent of Rent -021 062 113 078 83 171
(000) (000) (024)
CPI-U Rent of Primary Residence -015 067 116 084 83 217
(000) (000) (026)
PCE Health Care Services -006 062 092 042 83 207
(038) (000) (026)
PCE Services Less Energy Rent of Shelter amp Health care -004 035 172 038 83 226
(050) (000) (028)
CPI-U Services Less Energy Services amp Rent of Shelter -015 040 188 034 83 218
(001) (000) (040)
CPI-U Medical Care Services -005 070 115 034 83 201
(051) (000) (045)
CPI-U Food away from Home -009 062 105 057 83 264
(005) (000) (025)
CPI-U Education Services -007 093 030 081 83 202
(016) (000) (029)
CPI-U Transportation Services -002 -011 320 016 83 198
(087) (027) (036)
Unemployment Gap Lagged Inflation Constant Adjusted R2 Observations Durbin-Watson Statistic
PCE Durable Goods 008 028 -154 027 83 183
(031) (001) (024)
PCE Motor Vehicles and Parts 031 030 -021 043 83 178
(005) (000) (025)
PCE Video Audio Photo amp 016 060 -395 044 83 222
Information Processing Equipment amp Media (034) (000) (087)
PCE Other Durable Goods (including Medical Equipments) -010 038 -050 027 83 188
(028) (000) (019)
PCE Nondurable Goods Less Energy -014 073 039 044 83 203
(005) (000) (017)
PCE Food amp Beverage Purchased for Off-Premises Consumption -024 066 071 055 83 226
(004) (000) (024)
CPI-U Food at Home -027 063 082 052 83 216
(005) (000) (028)
CPI-U Alcoholic Beverages -017 034 147 016 83 209
(004) (000) (026)
PCE Pharmaceutical amp Other Medical Products -002 033 202 020 83 173
(088) (000) (039)
PCE Other Nondurable Goods 008 025 000 042 83 179
(046) (001) (018)
CPI-U Apparel 054 014 -069 022 83 191
(000) (018) (030)
Current vintage data
Dec-16 Jan-17 Feb-17 Mar-17 Apr-17 May-17 Jun-17 Jul-17 Aug-17 Sep-17 Oct-17 Nov-17 Dec-17
Rose at 0-2 rate 314 179 190 266 178 158 181 206 275 165 181 224 251
Rose at 2-3 rate 82 137 111 171 191 280 111 130 116 216 88 97 39
Rose at 3-5 rate 240 198 253 80 126 136 209 161 241 125 231 258 177
Rose at 5-10 rate 100 122 57 70 71 85 91 60 51 114 50 122 81
Rose faster than 10 rate 67 137 108 27 151 55 75 116 65 97 159 82 134
227 281 387 282 286 334 328 253 283 291 218 317
212 172 215455310712 218771897151
140 194 153949709569 74785941399
177 157 175371335238 221799519999
83 82 74591464835 84429446757
90 94 92689863883 125100452725
298 301 287942315763 275112741969
2017Q1 2017Q2 2017Q3 2017Q4
Fell 2983 3008 2879 2751
Rose at 0-2 rate 2118 1723 2155 2188
Rose at 2-3 rate 1396 1938 1539 748
Rose at 3-5 rate 1769 1573 1754 2218
Rose at 5-10 rate 829 821 746 844
Rose faster than 10 rate 905 937 927 1251
Major Sectors CPI PCEPI
Housing 426 183
Health Care 85 231
Food and Beverages 146 137
Transportation 153 90
Recreation 57 89
Education and Communication 70 46
Apparel 30 29
Financial Services 02 47
Other 30 147
Total 100 100
Data December 2016
Naiumlve Phillips-Curve-Style Models (Sample 1998-2017)
8 9 10 11
Variables Constant Lagged Inflation Unemployment Gap Adjusted R2 Order of AR Order of Lagged Rucgap
Owners Equivalent of Rent 118 062 -022 078 1 1
(48) (79) -(40)
Rent of Primary Residence 141 060 -018 084 1 4
(48) (74) -(33)
Medical Care Services 131 067 -007 032 2
(27) (58) -(09)
Education Services 023 095 -009 078 4 2
(07) (149) -(16)
Transportation Services 26 01 -00 018 1 3
(59) (05) -(02)
Apparel -060 027 043 016 4 0
-(19) (15) (23)
New Vehicles -046 003 065 018 1 0
-(17) (03) (39)
Used Cars and Trucks -001 031 092 028 2 4
-(00) (35) (19)
Medical Care Goods 23 02 -01 023 3
(51) (14) -(08)
Food away from Home 116 060 -008 050 1 2
(40) (62) -(15)
Food at Home 105 063 -009 059 1
(37) (86) -(07)
Energy 983 -022 -061 048 1
(48) -(22) -(06)
Unemployment Gap Lagged Inflation Constant Adjusted R2 Obs Durbin-Watson Statistic Order of Lagged Inflation Order of Lagged Unemployment Gap
Services
Owners Equivalent of Rent -021 062 113 078 83 171 1 1
000 000 024
Rent of Primary Residence -015 067 116 084 83 217 1 5
000 000 026
Food away from Home -008 061 108 057 83 251 2 2
007 000 025
Medical Care Services -005 070 115 034 83 201 2 0
051 000 045
Education Services -007 093 030 081 83 202 4 2
016 000 029
Transportation Services -002 -011 320 016 83 198 2 3
087 027 036
Goods
Apparel 050 010 -054 008 83 192 4 0
001 039 032
New Vehicles 038 002 -034 034 83 186 1 0
001 084 023
Used Cars and Trucks 038 018 -019 034 83 174 2 4
047 013 082
Food at Home -005 065 103 057 83 237 1 0
072 000 027
Medical Care Goods -005 046 169 056 83 196 3 0
053 000 028
Controlling Inflnm + Inflne
Unemployment Gap Lagged Inflation Constant Adjusted R2 Observations Durbin-Watson Statistic Order of Lagged Inflation Order of Lagged Unemployment Gap
Owners Equivalent of Rent (OER) -0212 0633 1120 077 80 179 1 1
(0058) (0082) (0260)
Rent of Primary Residence -0171 0604 1395 084 80 201 1 5
(0056) (0085) (0308)
Medical Care Services -0070 0693 1191 031 80 205 2 0
(0083) (0123) (0514)
Education Services -0087 0947 0296 078 80 204 4 2
(0055) (0067) (0354)
Transportation Services -0035 0154 2284 019 80 203 2 3
(0130) (0160) (0485)
Apparel 0416 0305 -0594 015 80 187 4 0
(0187) (0178) (0327)
New Vehicles 0655 0021 -0494 017 80 200 1 0
(0169) (0112) (0287)
Used Cars and Trucks 0410 0215 -0860 038 80 185 2 4
(0535) (0114) (0902)
Medical Care Goods -0082 0202 2251 022 80 192 3 0
(0105) (0141) (0458)
Food away from Home -0086 0613 1159 059 80 236 2 2
(0132) (0074) (0302)
Food at Home -0065 0751 0781 053 80 216 1 0
(0049) (0116) (0340)
Energy -0735 0068 2120 096 80 134 2 0
(0311) (0035) (0651)
Controlling Inflnm
Unemployment Gap Lagged Inflation Constant Adjusted R2 Observations Durbin-Watson Statistic Order of Lagged Inflation Order of Lagged Unemployment Gap
Core (XFE) Services
Owners Equivalent of Rent (OER) -0212 0632 1129 078 80 180 1 1
(0058) (0081) (0257)
Rent of Primary Residence -0171 0605 1393 084 80 201 1 5
(0055) (0084) (0302)
Medical Care Services -0068 0696 1189 032 80 205 2 0
(0082) (0122) (0511)
Education Services -0087 0943 0287 078 80 201 4 2
(0055) (0067) (0353)
Transportation Services -0030 0076 2602 017 80 202 2 3
(0131) (0152) (0440)
Apparel 0426 0292 -0544 016 80 189 4 0
(0186) (0176) (0315)
New Vehicles 0658 0023 -0436 017 80 196 1 0
(0168) (0112) (0272)
Used Cars and Trucks 0399 0190 -0322 036 80 171 2 4
(0543) (0115) (0861)
Medical Care Goods -0080 0203 2289 022 80 193 3 0
(0104) (0140) (0453)
Food away from Home -0090 0628 1038 059 80 237 2 2
(0132) (0073) (0282)
Food at Home -0064 0754 0741 053 80 216 1 0
(0049) (0116) (0338)
Energy -0678 -0305 10270 049 80 198 2 0
(1085) (0114) (2053)
Major CPI Components Summary Statistics Categorization
Mean Standard Deviation Relative Importance (2017Q4) Change in Relative Importantce CPI Excluding Food and Energy Sticky CPI Probability (= Median CPI) (1998-2007)
1 2 3 4 5 6 7
Core (XFE) Services
Owners Equivalent of Rent (OER) 27 11 232 298 Y Y 52
Rent of Primary Residence 32 11 79 101 Y Y 5
Medical Care Services 38 13 67 233 Y Y 2
Education Services 49 15 30 058 Y Y 0
Transportation Services 27 18 60 -105 Y Y 5
Core (XFE) Goods
Apparel -03 25 31 -189 Y N 2
New Vehicles 01 23 36 -142 Y N 3
Used Cars and Trucks -03 8 21 020 Y N 0
Medical Care Goods 29 16 18 059 Y Y 1
Food and Energy
Food away from Home 28 09 59 019 N Y 11
Food at Home 21 27 77 -201 N N 6
Energy 36 202 75 078 N N 1
Unemployment Gap Lagged Inflation Constant Adjusted R2 Observations Durbin-Watson Statistic
PCE Services Less Energy -014 032 191 046 83 185
(000) (001) (035)
PCE Housing Services -023 058 129 080 83 208
(000) (000) (024)
CPI-U Owners Equivalent of Rent -021 062 113 078 83 171
(000) (000) (024)
CPI-U Rent of Primary Residence -015 067 116 084 83 217
(000) (000) (026)
PCE Health Care Services -006 062 092 042 83 207
(038) (000) (026)
PCE Services Less Energy Rent of Shelter amp Health care -004 035 172 038 83 226
(050) (000) (028)
CPI-U Services Less Energy Services amp Rent of Shelter -015 040 188 034 83 218
(001) (000) (040)
CPI-U Medical Care Services -005 070 115 034 83 201
(051) (000) (045)
CPI-U Food away from Home -009 062 105 057 83 264
(005) (000) (025)
CPI-U Education Services -007 093 030 081 83 202
(016) (000) (029)
CPI-U Transportation Services -002 -011 320 016 83 198
(087) (027) (036)
Unemployment Gap Lagged Inflation Constant Adjusted R2 Observations Durbin-Watson Statistic
PCE Durable Goods 008 028 -154 027 83 183
(031) (001) (024)
PCE Motor Vehicles and Parts 031 030 -021 043 83 178
(005) (000) (025)
PCE Video Audio Photo amp 016 060 -395 044 83 222
Information Processing Equipment amp Media (034) (000) (087)
PCE Other Durable Goods (including Medical Equipments) -010 038 -050 027 83 188
(028) (000) (019)
PCE Nondurable Goods Less Energy -014 073 039 044 83 203
(005) (000) (017)
PCE Food amp Beverage Purchased for Off-Premises Consumption -024 066 071 055 83 226
(004) (000) (024)
CPI-U Food at Home -027 063 082 052 83 216
(005) (000) (028)
CPI-U Alcoholic Beverages -017 034 147 016 83 209
(004) (000) (026)
PCE Pharmaceutical amp Other Medical Products -002 033 202 020 83 173
(088) (000) (039)
PCE Other Nondurable Goods 008 025 000 042 83 179
(046) (001) (018)
CPI-U Apparel 054 014 -069 022 83 191
(000) (018) (030)
Current vintage data
Dec-16 Jan-17 Feb-17 Mar-17 Apr-17 May-17 Jun-17 Jul-17 Aug-17 Sep-17 Oct-17 Nov-17 Dec-17
Rose at 0-2 rate 314 179 190 266 178 158 181 206 275 165 181 224 251
Rose at 2-3 rate 82 137 111 171 191 280 111 130 116 216 88 97 39
Rose at 3-5 rate 240 198 253 80 126 136 209 161 241 125 231 258 177
Rose at 5-10 rate 100 122 57 70 71 85 91 60 51 114 50 122 81
Rose faster than 10 rate 67 137 108 27 151 55 75 116 65 97 159 82 134
227 281 387 282 286 334 328 253 283 291 218 317
212 172 215455310712 218771897151
140 194 153949709569 74785941399
177 157 175371335238 221799519999
83 82 74591464835 84429446757
90 94 92689863883 125100452725
298 301 287942315763 275112741969
2017Q1 2017Q2 2017Q3 2017Q4
Fell 2983 3008 2879 2751
Rose at 0-2 rate 2118 1723 2155 2188
Rose at 2-3 rate 1396 1938 1539 748
Rose at 3-5 rate 1769 1573 1754 2218
Rose at 5-10 rate 829 821 746 844
Rose faster than 10 rate 905 937 927 1251
Major Sectors CPI PCEPI
Housing 426 183
Health Care 85 231
Food and Beverages 146 137
Transportation 153 90
Recreation 57 89
Education and Communication 70 46
Apparel 30 29
Financial Services 02 47
Other 30 147
Total 100 100
Data December 2016
Naiumlve Phillips-Curve-Style Models (Sample 1998-2017)
8 9 10 11
Variables Constant Lagged Inflation Unemployment Gap Adjusted R2 Order of AR Order of Lagged Rucgap
Owners Equivalent of Rent 118 062 -022 078 1 1
(48) (79) -(40)
Rent of Primary Residence 141 060 -018 084 1 4
(48) (74) -(33)
Medical Care Services 131 067 -007 032 2
(27) (58) -(09)
Education Services 023 095 -009 078 4 2
(07) (149) -(16)
Transportation Services 26 01 -00 018 1 3
(59) (05) -(02)
Apparel -060 027 043 016 4 0
-(19) (15) (23)
New Vehicles -046 003 065 018 1 0
-(17) (03) (39)
Used Cars and Trucks -001 031 092 028 2 4
-(00) (35) (19)
Medical Care Goods 23 02 -01 023 3
(51) (14) -(08)
Food away from Home 116 060 -008 050 1 2
(40) (62) -(15)
Food at Home 105 063 -009 059 1
(37) (86) -(07)
Energy 983 -022 -061 048 1
(48) -(22) -(06)
Unemployment Gap Lagged Inflation Constant Adjusted R2 Obs Durbin-Watson Statistic Order of Lagged Inflation Order of Lagged Unemployment Gap
Services
Owners Equivalent of Rent -021 062 113 078 83 171 1 1
000 000 024
Rent of Primary Residence -015 067 116 084 83 217 1 5
000 000 026
Food away from Home -008 061 108 057 83 251 2 2
007 000 025
Medical Care Services -005 070 115 034 83 201 2 0
051 000 045
Education Services -007 093 030 081 83 202 4 2
016 000 029
Transportation Services -002 -011 320 016 83 198 2 3
087 027 036
Goods
Apparel 050 010 -054 008 83 192 4 0
001 039 032
New Vehicles 038 002 -034 034 83 186 1 0
001 084 023
Used Cars and Trucks 038 018 -019 034 83 174 2 4
047 013 082
Food at Home -005 065 103 057 83 237 1 0
072 000 027
Medical Care Goods -005 046 169 056 83 196 3 0
053 000 028
Controlling Inflnm + Inflne
Unemployment Gap Lagged Inflation Constant Adjusted R2 Observations Durbin-Watson Statistic Order of Lagged Inflation Order of Lagged Unemployment Gap
Owners Equivalent of Rent (OER) -0212 0633 1120 077 80 179 1 1
(0058) (0082) (0260)
Rent of Primary Residence -0171 0604 1395 084 80 201 1 5
(0056) (0085) (0308)
Medical Care Services -0070 0693 1191 031 80 205 2 0
(0083) (0123) (0514)
Education Services -0087 0947 0296 078 80 204 4 2
(0055) (0067) (0354)
Transportation Services -0035 0154 2284 019 80 203 2 3
(0130) (0160) (0485)
Apparel 0416 0305 -0594 015 80 187 4 0
(0187) (0178) (0327)
New Vehicles 0655 0021 -0494 017 80 200 1 0
(0169) (0112) (0287)
Used Cars and Trucks 0410 0215 -0860 038 80 185 2 4
(0535) (0114) (0902)
Medical Care Goods -0082 0202 2251 022 80 192 3 0
(0105) (0141) (0458)
Food away from Home -0086 0613 1159 059 80 236 2 2
(0132) (0074) (0302)
Food at Home -0065 0751 0781 053 80 216 1 0
(0049) (0116) (0340)
Energy -0735 0068 2120 096 80 134 2 0
(0311) (0035) (0651)
Controlling Inflnm
Unemployment Gap Lagged Inflation Constant Adjusted R2 Observations Durbin-Watson Statistic Order of Lagged Inflation Order of Lagged Unemployment Gap
Core (XFE) Services
Owners Equivalent of Rent (OER) -0212 0632 1129 078 80 180 1 1
(0058) (0081) (0257)
Rent of Primary Residence -0171 0605 1393 084 80 201 1 5
(0055) (0084) (0302)
Medical Care Services -0068 0696 1189 032 80 205 2 0
(0082) (0122) (0511)
Education Services -0087 0943 0287 078 80 201 4 2
(0055) (0067) (0353)
Transportation Services -0030 0076 2602 017 80 202 2 3
(0131) (0152) (0440)
Apparel 0426 0292 -0544 016 80 189 4 0
(0186) (0176) (0315)
New Vehicles 0658 0023 -0436 017 80 196 1 0
(0168) (0112) (0272)
Used Cars and Trucks 0399 0190 -0322 036 80 171 2 4
(0543) (0115) (0861)
Medical Care Goods -0080 0203 2289 022 80 193 3 0
(0104) (0140) (0453)
Food away from Home -0090 0628 1038 059 80 237 2 2
(0132) (0073) (0282)
Food at Home -0064 0754 0741 053 80 216 1 0
(0049) (0116) (0338)
Energy -0678 -0305 10270 049 80 198 2 0
(1085) (0114) (2053)
Major CPI Components Summary Statistics Categorization
Mean Standard Deviation Relative Importance (2017Q4) Change in Relative Importantce CPI Excluding Food and Energy Sticky CPI Probability (= Median CPI) (1998-2007)
1 2 3 4 5 6 7
Core (XFE) Services
Owners Equivalent of Rent (OER) 27 11 232 298 Y Y 52
Rent of Primary Residence 32 11 79 101 Y Y 5
Medical Care Services 38 13 67 233 Y Y 2
Education Services 49 15 30 058 Y Y 0
Transportation Services 27 18 60 -105 Y Y 5
Core (XFE) Goods
Apparel -03 25 31 -189 Y N 2
New Vehicles 01 23 36 -142 Y N 3
Used Cars and Trucks -03 8 21 020 Y N 0
Medical Care Goods 29 16 18 059 Y Y 1
Food and Energy
Food away from Home 28 09 59 019 N Y 11
Food at Home 21 27 77 -201 N N 6
Energy 36 202 75 078 N N 1
Unemployment Gap Lagged Inflation Constant Adjusted R2 Observations Durbin-Watson Statistic
PCE Services Less Energy -014 032 191 046 83 185
(000) (001) (035)
PCE Housing Services -023 058 129 080 83 208
(000) (000) (024)
CPI-U Owners Equivalent of Rent -021 062 113 078 83 171
(000) (000) (024)
CPI-U Rent of Primary Residence -015 067 116 084 83 217
(000) (000) (026)
PCE Health Care Services -006 062 092 042 83 207
(038) (000) (026)
PCE Services Less Energy Rent of Shelter amp Health care -004 035 172 038 83 226
(050) (000) (028)
CPI-U Services Less Energy Services amp Rent of Shelter -015 040 188 034 83 218
(001) (000) (040)
CPI-U Medical Care Services -005 070 115 034 83 201
(051) (000) (045)
CPI-U Food away from Home -009 062 105 057 83 264
(005) (000) (025)
CPI-U Education Services -007 093 030 081 83 202
(016) (000) (029)
CPI-U Transportation Services -002 -011 320 016 83 198
(087) (027) (036)
Unemployment Gap Lagged Inflation Constant Adjusted R2 Observations Durbin-Watson Statistic
PCE Durable Goods 008 028 -154 027 83 183
(031) (001) (024)
PCE Motor Vehicles and Parts 031 030 -021 043 83 178
(005) (000) (025)
PCE Video Audio Photo amp 016 060 -395 044 83 222
Information Processing Equipment amp Media (034) (000) (087)
PCE Other Durable Goods (including Medical Equipments) -010 038 -050 027 83 188
(028) (000) (019)
PCE Nondurable Goods Less Energy -014 073 039 044 83 203
(005) (000) (017)
PCE Food amp Beverage Purchased for Off-Premises Consumption -024 066 071 055 83 226
(004) (000) (024)
CPI-U Food at Home -027 063 082 052 83 216
(005) (000) (028)
CPI-U Alcoholic Beverages -017 034 147 016 83 209
(004) (000) (026)
PCE Pharmaceutical amp Other Medical Products -002 033 202 020 83 173
(088) (000) (039)
PCE Other Nondurable Goods 008 025 000 042 83 179
(046) (001) (018)
CPI-U Apparel 054 014 -069 022 83 191
(000) (018) (030)
Page 7: Inflation and the Phillips Curve · Phillips curve is so flat Method: Estimating Phillips curve equations at the component level – Measure of slack: The unemployment gap (CBO’s

6

CBO

Cyclical Sensitivity of InflationGoods Versus Services

7

CBO

Goal Understanding why the aggregate Phillips curve is so flat

Method Estimating Phillips curve equations at the component levelndash Measure of slack The unemployment gap (CBOrsquos estimate)ndash Sample 1998Q1ndash2018Q3 (stable inflation expectations)ndash Control for Relative price of imports and energy goods outliers (for example ldquocash

for clunkersrdquo)ndash Similar to Stock and Watson (2018) Struyven (2017)

Main Finding Divergence between goods and services in terms of cyclical sensitivity

ndash Services Remained largely pro-cyclicalmdashfor example shelterndash Goods Not pro-cyclical in the past two decades

Dampening the slope of the aggregate Phillips curve Exception Food prices

Phillips Curve Model at the Component Level

8

CBO

Shelter Inflation

9

CBO

Auto Inflation

10

CBO

Services Largely Pro-Cyclical

Unemployment Gap

Lagged Inflation Constant Adjusted R2

PCE Services Less Energy -014 032 191 046(000) (001) (035)

PCE Housing Services -023 058 129 080(000) (000) (024)

CPI-U Owners Equivalent of Rent -021 062 113 078(000) (000) (024)

CPI-U Rent of Primary Residence -015 067 116 084(000) (000) (026)

PCE Health Care Services -006 062 092 042(038) (000) (026)

PCE Services Less Energy Rent of Shelter amp Health care -004 035 172 038(050) (000) (028)

CPI-U Services Less Energy Services amp Rent of Shelter -015 040 188 034(001) (000) (040)

CPI-U Medical Care Services -005 070 115 034(051) (000) (045)

CPI-U Food away from Home -009 062 105 057(005) (000) (025)

CPI-U Education Services -007 093 030 081(016) (000) (029)

CPI-U Transportation Services -002 -011 320 016(087) (027) (036)

CPIU MicroPC - Gd

CPIU MicroPC - Sv

CPIU Components

CPIU MicroPC

Disaggregated PC Model

CPI and PCE weights

Dist of Price Changes (PCE)

lt02017Q12017Q22017Q32017Q42982879399018251530076497118373328794231576306846275112741969116890-22017Q12017Q22017Q32017Q4211846689120427351723027711342023221545531071181461218771897151376142-32017Q12017Q22017Q32017Q413958943933910467193842670834840815394970956904032747859413992923283-52017Q12017Q22017Q32017Q4176887169228583721572899097997604717537133523823844221799519998565525-102017Q12017Q22017Q32017Q482906102250864162821465544005778097459146483527973784429446756549655gt102017Q12017Q22017Q32017Q490482660159195003936531226468855499268986388255841612510045272509943

Percent of Expenditures

11

CBO

Goods Largely Not Pro-Cyclical Except Food

Unemployment Gap

Lagged Inflation Constant Adjusted R2

PCE Durable Goods 008 028 -154 027(031) (001) (024)

PCE Motor Vehicles and Parts 031 030 -021 043(005) (000) (025)

PCE Video Audio Photo amp 016 060 -395 044 Information Processing Equipment amp Media (034) (000) (087)

PCE Other Durable Goods (including Medical Equipments) -010 038 -050 027(028) (000) (019)

PCE Nondurable Goods Less Energy -014 073 039 044(005) (000) (017)

PCE Food amp Beverage Purchased for Off-Premises Consumpt -024 066 071 055(004) (000) (024)

CPI-U Food at Home -027 063 082 052(005) (000) (028)

CPI-U Alcoholic Beverages -017 034 147 016(004) (000) (026)

PCE Pharmaceutical amp Other Medical Products -002 033 202 020(088) (000) (039)

PCE Other Nondurable Goods 008 025 000 042(046) (001) (018)

CPI-U Apparel 054 014 -069 022(000) (018) (030)

CPIU MicroPC - Gd

CPIU MicroPC - Sv

CPIU Components

CPIU MicroPC

Disaggregated PC Model

CPI and PCE weights

Dist of Price Changes (PCE)

lt02017Q12017Q22017Q32017Q42982879399018251530076497118373328794231576306846275112741969116890-22017Q12017Q22017Q32017Q4211846689120427351723027711342023221545531071181461218771897151376142-32017Q12017Q22017Q32017Q413958943933910467193842670834840815394970956904032747859413992923283-52017Q12017Q22017Q32017Q4176887169228583721572899097997604717537133523823844221799519998565525-102017Q12017Q22017Q32017Q482906102250864162821465544005778097459146483527973784429446756549655gt102017Q12017Q22017Q32017Q490482660159195003936531226468855499268986388255841612510045272509943

Percent of Expenditures

12

CBO

Servicesndash Prices are largely determined by domestic andor local factors

Household maintenance restaurants etcndash Cannot be inventoried

Goodsndash Lots of measurement issues and noise from one-off price shocks (Stock and

Watson 2018) Measurement issue very severe for apparel recreational goods financial

services etc One-off price shocks ldquocash for clunkersrdquo (2009) federal tobacco tax hike

(2009) ndash Tend to be more heavily influenced by long-run structural forces

Globalization Abdih et al (2016) and others ldquoThe Amazon effectrdquo Goolsbee and Klenow (2018) Increasing industrial concentration

Goods Versus Services Possible Explanations

13

CBO

Services Componentsndash Generally Phillips curve equations at the component level work relatively wellndash Special case PCE health care services (policy plays a large role)

CBOrsquos model incorporates CBOrsquos projection of Medicare reimbursement rate growth

Goods Componentsndash ldquoTop-down Approachrdquo CBO currently uses core PCE inflation (from the

aggregate Phillips curve) as an input in the equations for goods components Keep track of movements in relative prices Judgment in sector-specific trends Control for relative price of imports one-off price shocks etc

Forecasting Inflation at the Component Level

14

CBO

Modeling Inflation ExpectationsBackward-Looking Versus Anchored

15

CBO

Reduced-form

120587120587119905119905= 120630120630119860119860(119871119871)120587120587119905119905minus1 + (120783120783 minus 120630120630)120587120587lowast minus 120573120573 119880119880119905119905 minus 119880119880119905119905lowast + 120574120574119885119885119905119905 + 120598120598119905119905o 119860119860(119871119871)120587120587119905119905minus1 Use four lags of past inflationo 120587120587lowast Long-run inflationldquoanchorrdquoo 119880119880119905119905 minus 119880119880119905119905lowast The unemployment gap (CBOrsquos estimate)o 119885119885119905119905 Supply-side shocks including relative prices of imports and energy goodso Sample 1998Q1ndash2018Q3

Blanchard (2016) ldquoThe Phillips Curve Back to the rsquo60srdquo ndash Shows 120630120630 declined over time and is currently very small for headline CPI

But component-level analysis implies that the measure of inflation matters

This exercise Try ten different measures of aggregate inflation

Estimating the Aggregate Phillips Curve

16

CBO

Three measures of headline inflationndash Headline CPI-U (BLS) and Headline PCEPI (BEA) ndash Chained CPI-U (BLS)

Ten Measures of Inflation

17

CBO

Seven measures of core inflationndash Approach 1 Remove the most volatile price changes

XFE CPI-U (BLS) and XFE PCEPI (BEA) Median CPI-U and 16-Trimmed-Mean CPI-U (Federal Reserve Bank of

Cleveland) Rank price changes by size each month and trim the items with price

changes that are above or below a certain threshold ldquoMedianrdquo is just extreme trimming

Trimmed-Mean PCEPI (Federal Reserve Bank of Dallas) Trimming point chosen optimally every month

ndash Approach 2 Remove the most frequent price changes Sticky CPI-U and Sticky-XFE CPI (Federal Reserve Bank of Atlanta)

Price changes every 43 months or longer (Bils and Klenow 2004)

Ten Measures of Inflation (Continued)

18

CBO

Seven Measures of Core Inflation

19

CBO

Relative weight of lagged inflation and constantldquoanchorrdquondash Overall inflation 120572120572 asymp 02 consistent with Blanchard (2016) for headline CPI

Estimation Results I

This figure plots the sum of the estimated coefficients on lagged inflation terms using recursive samples that start in 1998Q1 and end in 2012Q1 2012Q2 hellip and 2018Q1 The Phillips curve equations are ldquounrestrictedrdquo as no assumption was imposed on the value of π before the estimation Instead the intercept of the equation which in theory equals απ was estimated and then the values of α and π were calculated by assuming the long-run restriction on the estimated coefficients

20

CBO

Relative weight of lagged inflation and constantldquoanchorrdquondash Overall inflation 120572120572 asymp 02 consistent with Blanchard (2016) for headline CPIndash Core inflation 120572120572 asymp 05 particularly for non-XFE measures

Estimation Results I (Continued)

This figure plots the sum of the estimated coefficients on lagged inflation terms using recursive samples that start in 1998Q1 and end in 2012Q1 2012Q2 hellip and 2018Q1 The Phillips curve equations are ldquounrestrictedrdquo as no assumption was imposed on the value of π before the estimation Instead the intercept of the equation which in theory equals απ was estimated and then the values of α and π were calculated by assuming the long-run restriction on the estimated coefficients

21

CBO

Further analysis using survey measures of inflation expectations suggests

Inflation expectations by consumers matter more for inflation dynamics than the expectations by professional forecasters for all ten measures of inflation

ndash Consumersrsquo expectations more closely resemble those of firms (Coibion and Gorodnichenko 2015)

ndash Transmission of professional forecastersrsquo views to consumers is weak in a low-inflation environment

ndash Coibion et al (2017) Similar finding for headline CPI

Long-run inflation expectations by consumers are ldquoshock-anchoredrdquo but not ldquolevel-anchoredrdquo (Ball and Mazumder 2011)

ndash Shock-anchoring Transitory shocks not passed to expectationsndash Level-anchoring Expectations tied to a particular level

Estimation Results I (Continued)

22

CBO

Comparing measures of core inflationndash The Phillips curve fits the non-XFE measures very well

Average adj 1198771198772 of non-XFE measures = 07 Ball and Mazumder (2014) Showed this for median CPI

ndash XFEs are ldquooutliersrdquo particularly XFE CPI-U (low 120572120572 and low 1198771198772) Average adj 1198771198772 of XFE measures = 025

Possible explanationndash Fewer goods prices in the non-XFE core measures

Goods price changes are more volatile Goods price changes occur more frequently

Estimation Results II

23

CBO

CPI Components Summary Statistics and Categorization

Mean Standard Deviation

Relative Importance

(2017)

Change in Relative

Importantce 2007-2017

XFE Sticky CPIProbability

(= Median CPI) (1998-2007)

(1) (2) (3) (4) (5) (6) (7)

Core (XFE) ServicesOwners Equivalent of Rent (OER) 27 11 232 298 Y Y 52Rent of Primary Residence 32 11 79 101 Y Y 5Medical Care Services 38 13 67 233 Y Y 2Education Services 49 15 30 058 Y Y 0Transportation Services 27 18 60 -105 Y Y 5

Core (XFE) GoodsApparel -03 25 31 -189 Y N 2New Vehicles 01 23 36 -142 Y N 3Used Cars and Trucks -03 8 21 020 Y N 0Medical Care Goods 29 16 18 059 Y Y 1

Food and EnergyFood away from Home 28 09 59 019 N Y 11Food at Home 21 27 77 -201 N N 6Energy 36 202 75 078 N N 1

CategorizationSummary Statistics

Major CPI Components

The categorization of components into sticky CPI is based on Bryan and Meyer (2010) ldquoAre Some Prices in the CPI More Forward Looking Than Others We Think Sordquo Economic Commentary Federal Reserve Bank of Cleveland httpswwwfrbatlantaorg-mediadocumentsresearchinflationprojectstickypricesticky-price-cpi-supplemental-readingpdf The probabilities of a componentrsquos being the median CPI are based on the ldquorevised methodologyrdquo that split the OER into four regional components For more detail see httpswwwclevelandfedorgenour-researchindicators-and-datamedian-cpirevised-methodologyaspx

CPIU MicroPC - Gd

CPIU MicroPC - Sv

CPIU Components

CPIU MicroPC

Disaggregated PC Model

CPI and PCE weights

Dist of Price Changes (PCE)

lt02017Q12017Q22017Q32017Q42982879399018251530076497118373328794231576306846275112741969116890-22017Q12017Q22017Q32017Q4211846689120427351723027711342023221545531071181461218771897151376142-32017Q12017Q22017Q32017Q413958943933910467193842670834840815394970956904032747859413992923283-52017Q12017Q22017Q32017Q4176887169228583721572899097997604717537133523823844221799519998565525-102017Q12017Q22017Q32017Q482906102250864162821465544005778097459146483527973784429446756549655gt102017Q12017Q22017Q32017Q490482660159195003936531226468855499268986388255841612510045272509943

Percent of Expenditures

24

CBO

The slope of the Phillips curve Flat but steeper for CPIs than PCEPIsndash 120573120573 = 005∿01 for PCEPIs but = 01∿02 for CPIsndash Why Shelter the most cyclically sensitive component has a much larger weight in CPI than in PCEPI

Estimation Results III

This figure plots the sum of the estimated coefficients on lagged inflation terms using recursive samples that start in 1998Q1 and end in 2012Q1 2012Q2 hellip and 2018Q1 The Phillips curve equations are ldquounrestrictedrdquo as no assumption was imposed on the value of π before the estimation Instead the intercept of the equation which in theory equals απ was estimated and then the values of α and π were calculated by assuming the long-run restriction on the estimated coefficients

25

CBO

The slope of the Phillips curve Flat but steeper for CPIs than PCEPIsndash 120573120573 = 005∿01 for PCEPIs but = 01∿02 for CPIsndash Why Shelter the most cyclically sensitive component has a much larger weight in CPI than in PCEPI

Estimation Results III (Continued)

This figure plots the sum of the estimated coefficients on lagged inflation terms using recursive samples that start in 1998Q1 and end in 2012Q1 2012Q2 hellip and 2018Q1 The Phillips curve equations are ldquounrestrictedrdquo as no assumption was imposed on the value of π before the estimation Instead an intercept of the equation which in theory equals απ was estimated and then the value of α and π were calculated by assuming the long-run restriction on the estimated coefficients

26

CBO

Reviewing the Findings

27

CBO

Phillips-curve analysis at the component level provides insight intondash Cyclical sensitivity of aggregate inflation

For most service components and food inflation process is pro-cyclical For most non-food good components inflation process is not pro-cyclical

Need better understanding and models for goods price inflationndash Difference in the behaviors of various inflation measures

CPI is more cyclically sensitive than PCEPI because shelter has larger share in CPI

Non-XFE measures of core inflation better capture movements in trend inflation because they contain fewer noisy goods components

The aggregate Phillips curve has shifted away from ldquoaccelerationistrdquo toward an ldquoanchoredrdquo form but the process appears incomplete

ndash Need better understanding of the formation process of inflation expectations particularly those of consumers and firms

Conclusions

28

CBO

Abdih Yasser Ravi Balakrishnan and Baoping Shang ldquoWhat Is Keeping US Core Inflation Low Insights From a Bottom-Up Approachrdquo International Monetary Fund 2016

Ball Laurence and Sandeep Mazumder ldquoInflation Dynamics and the Great Recessionrdquo Brookings Papers on Economic Activity (2011) 337ndash406

Blanchard Olivier ldquoThe Phillips Curve Back to the rsquo60s American Economic Review 1065 (2016) 31ndash34

Bils Mark and Peter J Klenow ldquoSome Evidence on the Importance of Sticky Pricesrdquo Journal of Political Economy 1125 (2004) 947ndash985

Coibion Olivier and Yuriy Gorodnichenko ldquoIs the Phillips Curve Alive and Well After All Inflation Expectations and the Missing Disinflationrdquo American Economic Journal Macroeconomics 71 (2015) 197ndash232

References

29

CBO

Coibion Olivier Yuriy Gorodnichenko and Rupal Kamdar ldquoThe Formation of Expectations Inflation and the Phillips Curverdquo No w23304 National Bureau of Economic Research 2017

Goolsbee Austan D and Peter J Klenow ldquoInternet Rising Prices Falling Measuring Inflation in a World of E-Commercerdquo AEA Papers and Proceedings Vol 108 2018

Stock J and Mark Watson ldquoSlack and Cyclically Sensitive Inflationrdquo ECB Forum on Central Banking Sintra Portugal 2018

Struyven Dann ldquoWhich Prices Still Respond to Slackrdquo Goldman Sachs Economics Research (October 31 2017)

References (Continued)

  • Inflation and the Phillips Curve
  • Inflation 1948ndash2018
  • Inflation Expectations 1948ndash2018
  • Unemployment 1948ndash2018
  • Structure of CBOrsquos Model for the Personal Consumption Expenditures (PCE) Price Index
  • Expectation-Augmented Phillips Curve
  • Slide Number 7
  • Phillips Curve Model at the Component Level
  • Shelter Inflation
  • Auto Inflation
  • Services Largely Pro-Cyclical
  • Goods Largely Not Pro-Cyclical Except Food
  • Goods Versus Services Possible Explanations
  • Forecasting Inflation at the Component Level
  • Slide Number 15
  • Estimating the Aggregate Phillips Curve
  • Ten Measures of Inflation
  • Ten Measures of Inflation (Continued)
  • Seven Measures of Core Inflation
  • Estimation Results I
  • Estimation Results I (Continued)
  • Estimation Results I (Continued)
  • Estimation Results II
  • CPI Components Summary Statistics and Categorization
  • Estimation Results III
  • Estimation Results III (Continued)
  • Slide Number 27
  • Conclusions
  • References
  • References (Continued)
Current vintage data
Dec-16 Jan-17 Feb-17 Mar-17 Apr-17 May-17 Jun-17 Jul-17 Aug-17 Sep-17 Oct-17 Nov-17 Dec-17
Rose at 0-2 rate 314 179 190 266 178 158 181 206 275 165 181 224 251
Rose at 2-3 rate 82 137 111 171 191 280 111 130 116 216 88 97 39
Rose at 3-5 rate 240 198 253 80 126 136 209 161 241 125 231 258 177
Rose at 5-10 rate 100 122 57 70 71 85 91 60 51 114 50 122 81
Rose faster than 10 rate 67 137 108 27 151 55 75 116 65 97 159 82 134
227 281 387 282 286 334 328 253 283 291 218 317
212 172 215455310712 218771897151
140 194 153949709569 74785941399
177 157 175371335238 221799519999
83 82 74591464835 84429446757
90 94 92689863883 125100452725
298 301 287942315763 275112741969
2017Q1 2017Q2 2017Q3 2017Q4
Fell 2983 3008 2879 2751
Rose at 0-2 rate 2118 1723 2155 2188
Rose at 2-3 rate 1396 1938 1539 748
Rose at 3-5 rate 1769 1573 1754 2218
Rose at 5-10 rate 829 821 746 844
Rose faster than 10 rate 905 937 927 1251
Major Sectors CPI PCEPI
Housing 426 183
Health Care 85 231
Food and Beverages 146 137
Transportation 153 90
Recreation 57 89
Education and Communication 70 46
Apparel 30 29
Financial Services 02 47
Other 30 147
Total 100 100
Data December 2016
Naiumlve Phillips-Curve-Style Models (Sample 1998-2017)
8 9 10 11
Variables Constant Lagged Inflation Unemployment Gap Adjusted R2 Order of AR Order of Lagged Rucgap
Owners Equivalent of Rent 118 062 -022 078 1 1
(48) (79) -(40)
Rent of Primary Residence 141 060 -018 084 1 4
(48) (74) -(33)
Medical Care Services 131 067 -007 032 2
(27) (58) -(09)
Education Services 023 095 -009 078 4 2
(07) (149) -(16)
Transportation Services 26 01 -00 018 1 3
(59) (05) -(02)
Apparel -060 027 043 016 4 0
-(19) (15) (23)
New Vehicles -046 003 065 018 1 0
-(17) (03) (39)
Used Cars and Trucks -001 031 092 028 2 4
-(00) (35) (19)
Medical Care Goods 23 02 -01 023 3
(51) (14) -(08)
Food away from Home 116 060 -008 050 1 2
(40) (62) -(15)
Food at Home 105 063 -009 059 1
(37) (86) -(07)
Energy 983 -022 -061 048 1
(48) -(22) -(06)
Unemployment Gap Lagged Inflation Constant Adjusted R2 Obs Durbin-Watson Statistic Order of Lagged Inflation Order of Lagged Unemployment Gap
Services
Owners Equivalent of Rent -021 062 113 078 83 171 1 1
000 000 024
Rent of Primary Residence -015 067 116 084 83 217 1 5
000 000 026
Food away from Home -008 061 108 057 83 251 2 2
007 000 025
Medical Care Services -005 070 115 034 83 201 2 0
051 000 045
Education Services -007 093 030 081 83 202 4 2
016 000 029
Transportation Services -002 -011 320 016 83 198 2 3
087 027 036
Goods
Apparel 050 010 -054 008 83 192 4 0
001 039 032
New Vehicles 038 002 -034 034 83 186 1 0
001 084 023
Used Cars and Trucks 038 018 -019 034 83 174 2 4
047 013 082
Food at Home -005 065 103 057 83 237 1 0
072 000 027
Medical Care Goods -005 046 169 056 83 196 3 0
053 000 028
Controlling Inflnm + Inflne
Unemployment Gap Lagged Inflation Constant Adjusted R2 Observations Durbin-Watson Statistic Order of Lagged Inflation Order of Lagged Unemployment Gap
Owners Equivalent of Rent (OER) -0212 0633 1120 077 80 179 1 1
(0058) (0082) (0260)
Rent of Primary Residence -0171 0604 1395 084 80 201 1 5
(0056) (0085) (0308)
Medical Care Services -0070 0693 1191 031 80 205 2 0
(0083) (0123) (0514)
Education Services -0087 0947 0296 078 80 204 4 2
(0055) (0067) (0354)
Transportation Services -0035 0154 2284 019 80 203 2 3
(0130) (0160) (0485)
Apparel 0416 0305 -0594 015 80 187 4 0
(0187) (0178) (0327)
New Vehicles 0655 0021 -0494 017 80 200 1 0
(0169) (0112) (0287)
Used Cars and Trucks 0410 0215 -0860 038 80 185 2 4
(0535) (0114) (0902)
Medical Care Goods -0082 0202 2251 022 80 192 3 0
(0105) (0141) (0458)
Food away from Home -0086 0613 1159 059 80 236 2 2
(0132) (0074) (0302)
Food at Home -0065 0751 0781 053 80 216 1 0
(0049) (0116) (0340)
Energy -0735 0068 2120 096 80 134 2 0
(0311) (0035) (0651)
Controlling Inflnm
Unemployment Gap Lagged Inflation Constant Adjusted R2 Observations Durbin-Watson Statistic Order of Lagged Inflation Order of Lagged Unemployment Gap
Core (XFE) Services
Owners Equivalent of Rent (OER) -0212 0632 1129 078 80 180 1 1
(0058) (0081) (0257)
Rent of Primary Residence -0171 0605 1393 084 80 201 1 5
(0055) (0084) (0302)
Medical Care Services -0068 0696 1189 032 80 205 2 0
(0082) (0122) (0511)
Education Services -0087 0943 0287 078 80 201 4 2
(0055) (0067) (0353)
Transportation Services -0030 0076 2602 017 80 202 2 3
(0131) (0152) (0440)
Apparel 0426 0292 -0544 016 80 189 4 0
(0186) (0176) (0315)
New Vehicles 0658 0023 -0436 017 80 196 1 0
(0168) (0112) (0272)
Used Cars and Trucks 0399 0190 -0322 036 80 171 2 4
(0543) (0115) (0861)
Medical Care Goods -0080 0203 2289 022 80 193 3 0
(0104) (0140) (0453)
Food away from Home -0090 0628 1038 059 80 237 2 2
(0132) (0073) (0282)
Food at Home -0064 0754 0741 053 80 216 1 0
(0049) (0116) (0338)
Energy -0678 -0305 10270 049 80 198 2 0
(1085) (0114) (2053)
Major CPI Components Summary Statistics Categorization
Mean Standard Deviation Relative Importance (2017) Change in Relative Importantce 2007-2017 XFE Sticky CPI Probability (= Median CPI) (1998-2007)
1 2 3 4 5 6 7
Core (XFE) Services
Owners Equivalent of Rent (OER) 27 11 232 298 Y Y 52
Rent of Primary Residence 32 11 79 101 Y Y 5
Medical Care Services 38 13 67 233 Y Y 2
Education Services 49 15 30 058 Y Y 0
Transportation Services 27 18 60 -105 Y Y 5
Core (XFE) Goods
Apparel -03 25 31 -189 Y N 2
New Vehicles 01 23 36 -142 Y N 3
Used Cars and Trucks -03 8 21 020 Y N 0
Medical Care Goods 29 16 18 059 Y Y 1
Food and Energy
Food away from Home 28 09 59 019 N Y 11
Food at Home 21 27 77 -201 N N 6
Energy 36 202 75 078 N N 1
Unemployment Gap Lagged Inflation Constant Adjusted R2 Observations Durbin-Watson Statistic
PCE Services Less Energy -014 032 191 046 83 185
(000) (001) (035)
PCE Housing Services -023 058 129 080 83 208
(000) (000) (024)
CPI-U Owners Equivalent of Rent -021 062 113 078 83 171
(000) (000) (024)
CPI-U Rent of Primary Residence -015 067 116 084 83 217
(000) (000) (026)
PCE Health Care Services -006 062 092 042 83 207
(038) (000) (026)
PCE Services Less Energy Rent of Shelter amp Health care -004 035 172 038 83 226
(050) (000) (028)
CPI-U Services Less Energy Services amp Rent of Shelter -015 040 188 034 83 218
(001) (000) (040)
CPI-U Medical Care Services -005 070 115 034 83 201
(051) (000) (045)
CPI-U Food away from Home -009 062 105 057 83 264
(005) (000) (025)
CPI-U Education Services -007 093 030 081 83 202
(016) (000) (029)
CPI-U Transportation Services -002 -011 320 016 83 198
(087) (027) (036)
Unemployment Gap Lagged Inflation Constant Adjusted R2 Observations Durbin-Watson Statistic
PCE Durable Goods 008 028 -154 027 83 183
(031) (001) (024)
PCE Motor Vehicles and Parts 031 030 -021 043 83 178
(005) (000) (025)
PCE Video Audio Photo amp 016 060 -395 044 83 222
Information Processing Equipment amp Media (034) (000) (087)
PCE Other Durable Goods (including Medical Equipments) -010 038 -050 027 83 188
(028) (000) (019)
PCE Nondurable Goods Less Energy -014 073 039 044 83 203
(005) (000) (017)
PCE Food amp Beverage Purchased for Off-Premises Consumption -024 066 071 055 83 226
(004) (000) (024)
CPI-U Food at Home -027 063 082 052 83 216
(005) (000) (028)
CPI-U Alcoholic Beverages -017 034 147 016 83 209
(004) (000) (026)
PCE Pharmaceutical amp Other Medical Products -002 033 202 020 83 173
(088) (000) (039)
PCE Other Nondurable Goods 008 025 000 042 83 179
(046) (001) (018)
CPI-U Apparel 054 014 -069 022 83 191
(000) (018) (030)
Current vintage data
Dec-16 Jan-17 Feb-17 Mar-17 Apr-17 May-17 Jun-17 Jul-17 Aug-17 Sep-17 Oct-17 Nov-17 Dec-17
Rose at 0-2 rate 314 179 190 266 178 158 181 206 275 165 181 224 251
Rose at 2-3 rate 82 137 111 171 191 280 111 130 116 216 88 97 39
Rose at 3-5 rate 240 198 253 80 126 136 209 161 241 125 231 258 177
Rose at 5-10 rate 100 122 57 70 71 85 91 60 51 114 50 122 81
Rose faster than 10 rate 67 137 108 27 151 55 75 116 65 97 159 82 134
227 281 387 282 286 334 328 253 283 291 218 317
212 172 215455310712 218771897151
140 194 153949709569 74785941399
177 157 175371335238 221799519999
83 82 74591464835 84429446757
90 94 92689863883 125100452725
298 301 287942315763 275112741969
2017Q1 2017Q2 2017Q3 2017Q4
Fell 2983 3008 2879 2751
Rose at 0-2 rate 2118 1723 2155 2188
Rose at 2-3 rate 1396 1938 1539 748
Rose at 3-5 rate 1769 1573 1754 2218
Rose at 5-10 rate 829 821 746 844
Rose faster than 10 rate 905 937 927 1251
Major Sectors CPI PCEPI
Housing 426 183
Health Care 85 231
Food and Beverages 146 137
Transportation 153 90
Recreation 57 89
Education and Communication 70 46
Apparel 30 29
Financial Services 02 47
Other 30 147
Total 100 100
Data December 2016
Naiumlve Phillips-Curve-Style Models (Sample 1998-2017)
8 9 10 11
Variables Constant Lagged Inflation Unemployment Gap Adjusted R2 Order of AR Order of Lagged Rucgap
Owners Equivalent of Rent 118 062 -022 078 1 1
(48) (79) -(40)
Rent of Primary Residence 141 060 -018 084 1 4
(48) (74) -(33)
Medical Care Services 131 067 -007 032 2
(27) (58) -(09)
Education Services 023 095 -009 078 4 2
(07) (149) -(16)
Transportation Services 26 01 -00 018 1 3
(59) (05) -(02)
Apparel -060 027 043 016 4 0
-(19) (15) (23)
New Vehicles -046 003 065 018 1 0
-(17) (03) (39)
Used Cars and Trucks -001 031 092 028 2 4
-(00) (35) (19)
Medical Care Goods 23 02 -01 023 3
(51) (14) -(08)
Food away from Home 116 060 -008 050 1 2
(40) (62) -(15)
Food at Home 105 063 -009 059 1
(37) (86) -(07)
Energy 983 -022 -061 048 1
(48) -(22) -(06)
Unemployment Gap Lagged Inflation Constant Adjusted R2 Obs Durbin-Watson Statistic Order of Lagged Inflation Order of Lagged Unemployment Gap
Services
Owners Equivalent of Rent -021 062 113 078 83 171 1 1
000 000 024
Rent of Primary Residence -015 067 116 084 83 217 1 5
000 000 026
Food away from Home -008 061 108 057 83 251 2 2
007 000 025
Medical Care Services -005 070 115 034 83 201 2 0
051 000 045
Education Services -007 093 030 081 83 202 4 2
016 000 029
Transportation Services -002 -011 320 016 83 198 2 3
087 027 036
Goods
Apparel 050 010 -054 008 83 192 4 0
001 039 032
New Vehicles 038 002 -034 034 83 186 1 0
001 084 023
Used Cars and Trucks 038 018 -019 034 83 174 2 4
047 013 082
Food at Home -005 065 103 057 83 237 1 0
072 000 027
Medical Care Goods -005 046 169 056 83 196 3 0
053 000 028
Controlling Inflnm + Inflne
Unemployment Gap Lagged Inflation Constant Adjusted R2 Observations Durbin-Watson Statistic Order of Lagged Inflation Order of Lagged Unemployment Gap
Owners Equivalent of Rent (OER) -0212 0633 1120 077 80 179 1 1
(0058) (0082) (0260)
Rent of Primary Residence -0171 0604 1395 084 80 201 1 5
(0056) (0085) (0308)
Medical Care Services -0070 0693 1191 031 80 205 2 0
(0083) (0123) (0514)
Education Services -0087 0947 0296 078 80 204 4 2
(0055) (0067) (0354)
Transportation Services -0035 0154 2284 019 80 203 2 3
(0130) (0160) (0485)
Apparel 0416 0305 -0594 015 80 187 4 0
(0187) (0178) (0327)
New Vehicles 0655 0021 -0494 017 80 200 1 0
(0169) (0112) (0287)
Used Cars and Trucks 0410 0215 -0860 038 80 185 2 4
(0535) (0114) (0902)
Medical Care Goods -0082 0202 2251 022 80 192 3 0
(0105) (0141) (0458)
Food away from Home -0086 0613 1159 059 80 236 2 2
(0132) (0074) (0302)
Food at Home -0065 0751 0781 053 80 216 1 0
(0049) (0116) (0340)
Energy -0735 0068 2120 096 80 134 2 0
(0311) (0035) (0651)
Controlling Inflnm
Unemployment Gap Lagged Inflation Constant Adjusted R2 Observations Durbin-Watson Statistic Order of Lagged Inflation Order of Lagged Unemployment Gap
Core (XFE) Services
Owners Equivalent of Rent (OER) -0212 0632 1129 078 80 180 1 1
(0058) (0081) (0257)
Rent of Primary Residence -0171 0605 1393 084 80 201 1 5
(0055) (0084) (0302)
Medical Care Services -0068 0696 1189 032 80 205 2 0
(0082) (0122) (0511)
Education Services -0087 0943 0287 078 80 201 4 2
(0055) (0067) (0353)
Transportation Services -0030 0076 2602 017 80 202 2 3
(0131) (0152) (0440)
Apparel 0426 0292 -0544 016 80 189 4 0
(0186) (0176) (0315)
New Vehicles 0658 0023 -0436 017 80 196 1 0
(0168) (0112) (0272)
Used Cars and Trucks 0399 0190 -0322 036 80 171 2 4
(0543) (0115) (0861)
Medical Care Goods -0080 0203 2289 022 80 193 3 0
(0104) (0140) (0453)
Food away from Home -0090 0628 1038 059 80 237 2 2
(0132) (0073) (0282)
Food at Home -0064 0754 0741 053 80 216 1 0
(0049) (0116) (0338)
Energy -0678 -0305 10270 049 80 198 2 0
(1085) (0114) (2053)
Major CPI Components Summary Statistics Categorization
Mean Standard Deviation Relative Importance (2017Q4) Change in Relative Importantce CPI Excluding Food and Energy Sticky CPI Probability (= Median CPI) (1998-2007)
1 2 3 4 5 6 7
Core (XFE) Services
Owners Equivalent of Rent (OER) 27 11 232 298 Y Y 52
Rent of Primary Residence 32 11 79 101 Y Y 5
Medical Care Services 38 13 67 233 Y Y 2
Education Services 49 15 30 058 Y Y 0
Transportation Services 27 18 60 -105 Y Y 5
Core (XFE) Goods
Apparel -03 25 31 -189 Y N 2
New Vehicles 01 23 36 -142 Y N 3
Used Cars and Trucks -03 8 21 020 Y N 0
Medical Care Goods 29 16 18 059 Y Y 1
Food and Energy
Food away from Home 28 09 59 019 N Y 11
Food at Home 21 27 77 -201 N N 6
Energy 36 202 75 078 N N 1
Unemployment Gap Lagged Inflation Constant Adjusted R2 Observations Durbin-Watson Statistic
PCE Services Less Energy -014 032 191 046 83 185
(000) (001) (035)
PCE Housing Services -023 058 129 080 83 208
(000) (000) (024)
CPI-U Owners Equivalent of Rent -021 062 113 078 83 171
(000) (000) (024)
CPI-U Rent of Primary Residence -015 067 116 084 83 217
(000) (000) (026)
PCE Health Care Services -006 062 092 042 83 207
(038) (000) (026)
PCE Services Less Energy Rent of Shelter amp Health care -004 035 172 038 83 226
(050) (000) (028)
CPI-U Services Less Energy Services amp Rent of Shelter -015 040 188 034 83 218
(001) (000) (040)
CPI-U Medical Care Services -005 070 115 034 83 201
(051) (000) (045)
CPI-U Food away from Home -009 062 105 057 83 264
(005) (000) (025)
CPI-U Education Services -007 093 030 081 83 202
(016) (000) (029)
CPI-U Transportation Services -002 -011 320 016 83 198
(087) (027) (036)
Unemployment Gap Lagged Inflation Constant Adjusted R2 Observations Durbin-Watson Statistic
PCE Durable Goods 008 028 -154 027 83 183
(031) (001) (024)
PCE Motor Vehicles and Parts 031 030 -021 043 83 178
(005) (000) (025)
PCE Video Audio Photo amp 016 060 -395 044 83 222
Information Processing Equipment amp Media (034) (000) (087)
PCE Other Durable Goods (including Medical Equipments) -010 038 -050 027 83 188
(028) (000) (019)
PCE Nondurable Goods Less Energy -014 073 039 044 83 203
(005) (000) (017)
PCE Food amp Beverage Purchased for Off-Premises Consumption -024 066 071 055 83 226
(004) (000) (024)
CPI-U Food at Home -027 063 082 052 83 216
(005) (000) (028)
CPI-U Alcoholic Beverages -017 034 147 016 83 209
(004) (000) (026)
PCE Pharmaceutical amp Other Medical Products -002 033 202 020 83 173
(088) (000) (039)
PCE Other Nondurable Goods 008 025 000 042 83 179
(046) (001) (018)
CPI-U Apparel 054 014 -069 022 83 191
(000) (018) (030)
Current vintage data
Dec-16 Jan-17 Feb-17 Mar-17 Apr-17 May-17 Jun-17 Jul-17 Aug-17 Sep-17 Oct-17 Nov-17 Dec-17
Rose at 0-2 rate 314 179 190 266 178 158 181 206 275 165 181 224 251
Rose at 2-3 rate 82 137 111 171 191 280 111 130 116 216 88 97 39
Rose at 3-5 rate 240 198 253 80 126 136 209 161 241 125 231 258 177
Rose at 5-10 rate 100 122 57 70 71 85 91 60 51 114 50 122 81
Rose faster than 10 rate 67 137 108 27 151 55 75 116 65 97 159 82 134
227 281 387 282 286 334 328 253 283 291 218 317
212 172 215455310712 218771897151
140 194 153949709569 74785941399
177 157 175371335238 221799519999
83 82 74591464835 84429446757
90 94 92689863883 125100452725
298 301 287942315763 275112741969
2017Q1 2017Q2 2017Q3 2017Q4
Fell 2983 3008 2879 2751
Rose at 0-2 rate 2118 1723 2155 2188
Rose at 2-3 rate 1396 1938 1539 748
Rose at 3-5 rate 1769 1573 1754 2218
Rose at 5-10 rate 829 821 746 844
Rose faster than 10 rate 905 937 927 1251
Major Sectors CPI PCEPI
Housing 426 183
Health Care 85 231
Food and Beverages 146 137
Transportation 153 90
Recreation 57 89
Education and Communication 70 46
Apparel 30 29
Financial Services 02 47
Other 30 147
Total 100 100
Data December 2016
Naiumlve Phillips-Curve-Style Models (Sample 1998-2017)
8 9 10 11
Variables Constant Lagged Inflation Unemployment Gap Adjusted R2 Order of AR Order of Lagged Rucgap
Owners Equivalent of Rent 118 062 -022 078 1 1
(48) (79) -(40)
Rent of Primary Residence 141 060 -018 084 1 4
(48) (74) -(33)
Medical Care Services 131 067 -007 032 2
(27) (58) -(09)
Education Services 023 095 -009 078 4 2
(07) (149) -(16)
Transportation Services 26 01 -00 018 1 3
(59) (05) -(02)
Apparel -060