Three Ways of Looking at the Government's Debt-Sustainability Transversality Condition
Noted for June 6, 2013

Goods vs. Services Inflation

Mark Thoma sends us to:

M. Henry Linder, Richard Peach, and Robert Rich: Drilling Down into Core Inflation: Goods versus Services:

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Drilling Down into Core Inflation: Goods versus Services - Liberty Street Economics: We find a strong relationship (both economically and statistically speaking) between core services inflation and long-term inflation expectations. There is also an important nonlinear relationship between core services inflation and the unemployment gap, indicating that the impact of changes in labor market slack on core services inflation depends on the level of slack itself.

For the core goods inflation model, the results suggest a very different set of factors influencing the behavior of the series. We find persistence in the series, that is, core goods inflation depends on its own past value. Relative import price inflation—growth in (non-petroleum) import prices less core goods inflation—also matters, suggesting goods prices act as the linkage between supply shocks and core inflation. There is also evidence of a relationship between core goods inflation and expected inflation, but that the relevant inflation expectations are associated with a short-term (one-year) horizon. Last, we find no meaningful effect of the unemployment gap on core goods inflation, consistent with commentators who contend that it is global (and not domestic) economic slack that impacts core goods inflation.