Abstract
An augmented P-Star model is specified, estimated and tested to explain the phenomenon of subdued inflation in the US. While the model is estimated for both total and core CPI, the results show that it works better if the general price level is proxied by total CPI. Based on the empirical results, subdued inflation is attributed to declining velocity of circulation and the accumulation of reserves by banks. Another contributing factor is declining import prices as a result of global competition. Therefore, both monetary and real factors have roles to play in the generation of US inflation.
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