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Extra on Price-Push Shocks and Inflation Expectations in a Phillips Curve Context

Gianluca Benigno notes that the NY Fed’s GSCPI, used on this submit on utilizing a naive expectations augmented Phillips curve to foretell inflation, can be utilized independently to foretell inflation, as in Akinci, et al. “How a lot can GSCPI enchancment assist scale back inflation” (Feb 2023).

First, each world provide and world demand components are related to intermediate demand items PPI inflation, in keeping with the globally traded nature of the products on this index. Second, the U.S.-specific demand issue turns into related in contributing to CPI inflation on prime of provide elements captured by the GSCPI. Third, as could possibly be anticipated, the GSCPI is extra related to items CPI inflation than with total inflation.

The next determine reveals the impression of oil, provide chain pressures and what’s unexplained.

It’s fascinating to see how a lot oil has contributed to upward (CPI) inflationary pressures, whereas GSCPI contributed considerably in 2021, transferring to unfavorable in second half of 2022. In different phrases, a considerable portion of present inflation is because of the upward motion in oil costs. Whereas their method doesn’t embrace inflation expectations, Benigno noticed to me that the Michigan measure is very correlated with oil costs (see right here).

As an apart, this level ought to encourage one to strive purging the inflation expectations measure I used of its correlation with oil worth adjustments, in order to mitigate the multicollinearity concern within the regressions used on this submit.



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