New Developments in the Study of Inflation Origins and Inflation Dynamics
Paper Session
Friday, Jan. 5, 2024 10:15 AM - 12:15 PM (CST)
- Chair: Ryan Chahrour, Cornell University
Estimating the Impact of News Media on Inflation Expectations
Abstract
Households’ expectations of inflation are an important component of macroeconomic modelling. The recent surge in expectations in the post-pandemic period has also renewed interest from policymakers in what drives households’ short-run inflation expectations. We explore the factors driving households’ short-run inflation expectations using the University of Michigan survey microdata. We consider four broad sets of factors: fundamentals, inflation itself, “salient inflation” (inflation in salient goods like gasoline and food), and the news media. We find that the volume and tone of inflation news both have strong effects on household inflation expectations. Fundamentals also play a modest role, while salient inflation plays little role once news is accounted for.The Dynamics of Large Inflation Surges
Abstract
We empirically characterize episodes of large inflation surges that have been observed worldwide in the last three decades. We document four facts. (1) Inflation surges tend to be persistent, with the duration of disinflation exceeding that of the initial inflation increase. (2) Surges are initially unexpected but followed by a gradual catch-up of average short-term expectations with realized inflation. (3) Long-term inflation expectations tend to exhibit increases that persist throughout disinflation. (4) Policy responses are characterized by hikes in nominal interest rates but no tightening of real rates or fiscal balances. In sum, episodes of large and persistent inflation tendto occur with government responses that depart from the prescriptions of textbook policy rules, and which instead are consistent with “fear of tightening.”
Unpacking Commodity Price Fluctuations: Reading the News to Understand Inflation
Abstract
Separately identifying demand- vs supply-side drivers of inflation is of first order importance for monetary policy. Using estimates of supply and demand-side disturbances in commodity markets from narrative sources, we show that text-based indicators provide distinct information about future inflation movements relative to existing predictors, inflation expectations and survey forecasts. Specifically, we document that, on average, demand-side disturbances play a significantly larger role. However, supply-side disturbances matter in particular circumstances, for instance during the last few years. The commodity-specific indicators are based on the analysis of international business news and combine state-of-the-art techniques in textual analysis with human auditing building on the work of Mouabbi, Passari and Rousset Planat (2023). In terms of magnitudes, the commodity-specific indicators reduce out-of-sample inflation forecast errors by up to 20-30 percent. When forecasting individual components separately, we find that supply-side fluctuations matter for food inflation, while fluctuations in demand matter most for energy inflation. We finally apply our indexes to the inflation decomposition framework of Blanchard and Bernanke (2023); replacing their shortage indicator with a narratively-identified component of supply decrease developments in commodity markets we corroborate their finding that the bulk of pandemic-era inflation can be attributed to commodity supply-chain disruptions resulting in price increases in goods markets.JEL Classifications
- E3 - Prices, Business Fluctuations, and Cycles
- E5 - Monetary Policy, Central Banking, and the Supply of Money and Credit