Abstract
This article investigates major determinants of the inflation rate in the United States. For this investigation, we use a vector autoregressive model that includes major variables interacting with the price level in the macroeconomy. Our results suggest that changes in the money supply, the wage rate, the budget deficit and energy prices are important determinants of the inflation rate in the United States. Further, the relative contribution of these factors to the variance of the forecast error of the price level is consistent with a more dominant impact for monetary changes on the inflation rate. This presents a channel through which Fed officials can counter successfully demand and supply shocks that have potential inflationary effects on the United States economy.
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