Aggregate Inflation Rate Research Articles

The “Benefits” of being small: Loose fiscal policy in the European Monetary Union

Independent central banks typically counteract positive fiscal shocks that would otherwise increase the inflation rate above the target. In a theoretical model, we show that, in a monetary union, this mechanism implies weaker responses to national fiscal shocks because the overarching central bank must account for the fiscal policies of all members. The model highlights that the response is especially weak for small members, given their marginal impact on the union’s aggregate inflation rate. Empirically, we exploit the exogenous variation in elections to show that the European Central Bank reacts more vigorously to fiscal shocks from larger countries. We then provide evidence that small countries take advantage of this; they engage more in fiscal expansions during election years than large countries. In an extension, we discuss, both theoretically and empirically, why the difference between small and large countries disappears in times of crisis.

Relationship between inflation and relative price variability in India

ABSTRACTThe paper attempts to investigate the relationship between relative price variability (RPV) and aggregate inflation rate through parametric and semi-parametric methods (kernel regression method). Monthly data of wholesale price index is used for the period from February 1995 to March 2014 for this purpose. Both the parametric and semi-parametric methods lead us to the non-monotonic relationship between RPV and inflation. An attempt has also been made to determine the optimal inflation rate that would minimize RPV.

EDB Macroreview, October 2016 - Economic Recovery Trajectories in Eurasia

In recent years, positive expectations have not been met for the second half of the year regarding economic recovery in the EDB member countries. In both 2015 and 2014, unfavorable external factors, primarily the fall in oil prices, had a negative effect on the dynamics of economic growth in the region. Available data for Q3 2016 indicate a more favorable scenario. This is suggested by both macroeconomic data and leading indicators, as well as signals from international credit rating agencies. Trends in regional growth dynamics in the past several months point to the start of economic recovery. Indeed, judging by data for July-August 2016, there are grounds for positive GDP growth rates in the EDB countries in Q3 2016. To all appearances, one can also expect positive changes in inflation before the end of 2016. The inflation rate in Russia is expected to be lower than 6% in 2016. It will hit an all-time low in 2017-2018 and be close to the central bank’s target of 4%. We expect a fall in the aggregate inflation rate of the EDB countries from 12.8% in 2015 to 6.1% in 2016, and a further slowdown in the rise in consumer prices to 4.8% in 2017 and 4.2% in 2018. Apart from the low world prices on food and primary commodities, a significant contribution to the decline in inflationary pressure is delivered by the stabilization of the exchange rates of the EDB countries’ currencies throughout Q2-Q3 2016. This trend is partially due to a decline in the outflow of capital from EDB countries and makes it possible for the countries to replenish their foreign exchange reserves. An important factor for the economic recovery in a number of the EDB countries was the rise in exports, primarily to the Russian Federation. In some countries, the acceleration of the rise in exports may be attributable to the depreciation of the national currency. However, Kyrgyzstan showed an increase in exports to Russia despite the strengthening of the som against the ruble, which suggests that integration factors may have played a certain role. Despite the positive changes however, there are lingering risks of imbalances in a number of macroeconomic sectors, primarily in the budgetary sphere. There are still significant global risks related to: the slowdown in the growth of the Chinese economy; the fall in the prices of primary commodities; the deterioration of the situation in the banking sector of European countries; as well as an increase in the Fed rate.

Guidelines for Measuring Disease Episodes: An Analysis of the Effects on the Components of Expenditure Growth.

To provide guidelines to researchers measuring health expenditures by disease and compare these methodologies' implied inflation estimates. A convenience sample of commercially insured individuals over the 2003 to 2007 period from Truven Health. Population weights are applied, based on age, sex, and region, to make the sample of over 4million enrollees representative of the entire commercially insured population. Different methods are used to allocate medical-care expenditures to distinct condition categories. We compare the estimates of disease-price inflation by method. Across a variety of methods, the compound annual growth rate stays within the range 3.1 to 3.9 percentage points. Disease-specific inflation measures are more sensitive to the selected methodology. The selected allocation method impacts aggregate inflation rates, but considering the variety of methods applied, the differences appear small. Future research is necessary to better understand these differences in other population samples and to connect disease expenditures to measures of quality.

Explaining inflation in the period of quantitative easing in Japan: Relative-price changes, aggregate demand, and monetary policy

Concentrating on the period of quantitative easing in Japan, this paper reexamines the correlation between the asymmetry of sectoral relative-price changes and the aggregate inflation rate. This correlation is widely interpreted as evidence that short-run inflation is determined by supply-side factors; however, we study whether, in addition to the inflation rate, monetary policy and aggregate demand explain it. Using producer price index data, we show, first, that the positive and significant effect of relative-price change asymmetries on inflation is not robust with respect to various indicators of asymmetry. Second, using a VAR framework, we find that aggregate demand robustly affects the measures of asymmetries, which raises doubt about whether they can be interpreted as pure supply-side indicators. Third, in addition to the indirect effect via measures of asymmetries, demand directly affects inflation. Thus, we reject the claim that the recent disinflation/deflation period in Japan can be understood as primarily a supply-side phenomenon and suggest that the main driving force was demand, whereas supply and monetary policy were of lesser importance.

Relative-Price Changes and Demand Factors in the Period of Quantitative Easing in Japan

Concentrating on the period of quantitative easing in Japan, this paper reexamines the correlation between the asymmetry of sectoral relative-price changes and the aggregate inflation rate. This correlation is widely interpreted as evidence that short-run inflation is determined by supply-side factors; however, we study whether, in addition to the inflation rate, monetary environment and aggregate demand explain this correlation. Using producer price index data, we show, first, that the positive and significant effect of relative-price change asymmetries on inflation is not robust with respect to various indicators of asymmetry. Second, indicators of aggregate demand and monetary environment affect the measures of asymmetries, which raises doubt about whether they can be interpreted as pure supply-side indicators. Third, in addition to the indirect effect via measures of asymmetries, demand and monetary factors directly affect inflation. Thus, we reject the claim that the recent disinflation/deflation period can be understood as primarily a supply-side phenomenon.

The Relationship Between Macroeconomic Variables and Relative Price Variability in Greek Agriculture

The purpose of this paper is to present a measure of relative price variability (RPV) among 53 agricultural products and to explore the relationships between RPV, aggregate inflation rate, and changes in economic activity for the period 1962–1997. We also estimate the effects of expected and unexpected components of inflation on price variability. The results show that changes in inflation rate and economic activity have a strong positive effect on RPV, in addition, expected inflation is found to be an important determinant for explaining price variability.

Examining Contributions to Core Consumer Inflation Measures

Abstract: The purpose of this paper is to examine the composition of inflation over time. The authors calculate the contributions to inflation for individual series of the consumer price index (CPI) and personal consumption expenditures price index (PCEPI) and then aggregate those contributions into major consumer expenditure categories. This technique provides a wealth of information concerning aggregate inflation behavior in a concise way, enabling the authors to describe the composition of inflation at any point in time. A particularly important benefit of this method is that it allows them to distinguish broad-based changes in inflation from changes due to relative price movements of a few components. The authors examine long-term trends in contributions to PCEPI core inflation and make inferences about the direction of inflation in the near term. In addition, they examine the decline in CPI core inflation over the 2002-03 period and find that the decline was largely driven by relative price changes of two components. JEL classification: C43, E31 Key words: CPI, consumer price index, PCE price index, inflation, prices Introduction Recent declines in U.S. core inflation measures have prompted a renewed effort to understand inflation dynamics. Since late 2001, core consumer inflation rates have declined to levels not seen since the early 1960s. Core inflation as measured by the consumer price index (CPI) declined to 1.1 percent (year-over-year) by the end of 2003 while the core personal consumption expenditures price index (PCEPI) moved below 1 percent. This decline in measured inflation rates, coupled with uncertainty about future demand conditions, generated concern and debate among analysts and policymakers about near-term inflation prospects. That concern was reflected in the May 2003 Federal Open Market Committee (FOMC) statement: ... the probability of an unwelcome substantial fall in inflation, though minor, exceeds that of a pickup in inflation from its already low level. As core consumer inflation rates have edged lower, an increasing and probably undue amount of attention is being placed on the most recent observation. An aggregate inflation rate is limited in the information it provides, especially with regard to the sources of its movements. It is generally difficult to know whether changes in aggregate inflation result from broad-based price changes or from price changes in only a few components. There may be instances in which significant but otherwise idiosyncratic relative price changes among a few underlying components drive movements in the aggregate inflation rate for a sustained period of time. Analysts often attempt to confront this issue by looking at price changes of major components and making inferences about the impact of those changes on the aggregate inflation rate. However, these inferences are imprecise and do not provide a complete accounting of aggregate inflation. A more rigorous approach is to provide a precise decomposition of the inflation rate. In this paper we take the latter, more rigorous approach. We calculate and plot the percentage point contributions of major consumer expenditure categories to core inflation measures over time. This technique provides a wealth of information concerning aggregate inflation behavior in a concise way, enabling us to describe the composition of inflation at any point in time. By highlighting the composition of aggregate inflation, we gain greater insight into the underlying trends in inflation and are able to make more informed inferences about the direction of inflation in the near term. A particularly important benefit of this method is that it allows us to distinguish broad-based changes in inflation from changes due to relative price movements of a few components. Using this approach to examine long-run trends in core inflation, our analysis finds that the primary contributor to core inflation over the last two decades has been core services. …

The Minimum Inflation Rate for Euroland

As a result of the Balassa effect relative prices change rapidly between and within the euro countries. Thus it is impossible to find a common monetary policy that will result in price stability in all countries. Based on empirical estimates of the Balassa model, the paper calculates a minimum aggregate inflation rate which is compatible with the requirement that no country face a deflation. This minimum aggeragate inflation rate is 0.94% in the euro-11 countries and 1.13% in an extended Europe which incorporates the east European countries.

Inflation uncertainty, inflationary shocks and the credibility of counterinflation policy

This paper assesses the contributions of price shocks, general price variability, and the credibility of counterinflation policy to changes in inflation uncertainty in the U.K. Uncertainty is measured by the root mean square error of consumer inflation forecasts. In contrast to the assumptions of much theory, uncertainty is not significantly affected by noise in individual or aggregate inflation rates. Factors which determine policy credibility are more important — the political party in government, the proximity of elections, and, under fixed exchange rates, the rate of inflation itself. However, government initiatives to increase credibility, through incomes policies and monetary targets, have failed to reduce uncertainty.

Divergent Sectorial Paths in Productivity and Long-term Inflation

The relationship between inflation and relative price variability (RPV) has been observed since the last century; recently, the subject has inspired much theoretical and empirical work. It has been claimed that relative price variability plays an autonomous role not only with respect to the aggregate inflation rate, but also with respect to the GDP growth rate, the interest rate and the monetary growth rate. We have developed an Input–Output (IO) model integrating real and cost-prices, which can accommodate different values of input substitution elasticities according to changes in relative prices, to explore the nature of this relationship in the Italian case. Our IO approach and the results show first, that the relationship also occurs at the structural level, and second, that the causal mechanism of the relationship involves divergent trends in sectorial productivity, with the following crucial factors: the adjustment of the compensation to productivity due to the primary factors, the substitution of f...

Wage Inflation and the Structure of Regional Unemployment: Comment

Frank Brechling's paper could well serve as a model for other authors. It is both imaginative and clear in its development of formal theory, and follows through with relevant econometric testing and estimation. Such basic work on the underpinnings of the Phillips relation is badly needed. Taking off from the work by Lipsey and Archibald that stresses the importance of the geographic segmentation of the labor market, Brechling considers two hypotheses for relating sectoral imbalances to the wage inflation-unemployment trade-off of the American economy. The first is the familiar aggregation of nonlinear local Phillips curves. The second provides for spillover effects through expectations from tight sectors to looser ones. One minor slip in the theoretical derivation should be avoided in the future. The aggregation of wage rates in equation (2) should use the fraction of earnings for sectoral weighting while in equation (6) the fraction of labor force should be used for sectoral weighting instead. In the theory development for the nonlinear aggregation hypothesis, the assumption is used that all sectoral Phillips relations are identical. However, empirical evidence indicates that this is not likely to be true, particularly because of different turnover rates in different sectors.l Since it is the nonlinearity of the local curves that causes the aggregate inflation rate to be increased by the dispersion of unemployment, Brechling only needs to assume identical slopes for local curves. Their levels may differ. Uniform sectoral unemployment rates would still give the minimum aggregate wage inflation rate, but the wage inflation rates would differ systematically by sector and his second deftnition of long run which leads to equation (11) would be suspect, i.e., that the expected inflation rate in each sector was equal to the aggregate inflation rate. Clearly, if inflation rates differ by sector, the relative wage structure will drift and this would induce the movement of demand and supply between sectors. Thus we need to develop the theory of the intersectoral adjustment process on a much more basic level than simply through the expectation formation process. One may question the label of dynamic market interdependence which Brech-