This report uses international comparisons to understand U.S. inflation dynamics since 1960. We decompose each G-7 country’s inflation path into a time-varying trend plus a transitory component, each with time-varying volatility. The level and volatility of trend inflation display coincident hump-shaped patterns that allow us to date the start of the Great Inflation in the late 1960s and a synchronized Inflation Stabilization in the mid 1980s. This temporal clustering narrows the set of G-7-wide economic developments which could have triggered the excessive monetary policy accommodation that was the ultimate source of the Great Inflation.
We present evidence suggesting that the most likely explanation is a change in monetary regime. Another robust feature of the data is that changes in inflation are negatively serially correlated.Conventional versions of a workhorse macroeconomic model regularly used by central banks cannot account for this pattern. Finally, we show that several survey measures of inflationexpectations help forecast the estimated trend of U.S. core CPI inflation, and that the trend also influences these survey measures over time.
This report employs international comparisons to examine the evolution of U.S. inflation dynamics since 1960, and to draw simple policy conclusions to aid in keeping inflation low. We begin by decomposing each G-7 country’s inflation path into a time-varying trend and a transitory component, each with time-varying volatility.
This exercise yields the following somewhat surprising result: The level and volatility of the inflation trend in each of the G-7 countries follows a hump-shaped pattern which rises and falls nearly in unison. This synchronization leads us to a data-driven dating of the Great Inflation (in the late 1960s), when inflation rose and became volatile, and of the Inflation Stabilization (around the mid-1980s), when inflation receded and steadied. This coincident timing: (1) narrows the set of G-7-wide economic developments that may have triggered the excessive policy accommodation of the Great Inflation; and (2) distinguishes the Inflation Stabilization from the Great Moderation of G-7 output growth volatility, which does not exhibit the same temporal clustering.
