Working Paper: NBER ID: w25512
Authors: Laurence M. Ball; Sandeep Mazumder
Abstract: Economists are puzzled by the behavior of U.S. inflation since the Great Recession of 2008-2009, and many suggest that the Phillips curve relating inflation to unemployment has broken down. This paper argues that inflation behavior is easier to understand if we divide headline inflation into core and transitory components, and if core inflation is measured by the weighted median of industry inflation rates. This weighted median is less volatile than the traditional measure of core inflation, the inflation rate excluding food and energy prices, because it filters out large price changes in all industries. We illustrate the usefulness of the weighted median with a case study of inflation in 2017 and early 2018. We also show that a Phillips curve relating the weighted median to unemployment appears clearly in the data for 1985-2017, with no sign of a breakdown in 2008.
Keywords: inflation; Phillips curve; core inflation; weighted median
JEL Codes: E31
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| weighted median inflation (E31) | understanding inflation behavior (E31) |
| weighted median inflation (E31) | inflation dynamics (E31) |
| unemployment (J64) | inflation behavior (E31) |
| inflation behavior (E31) | understanding inflation dynamics (E31) |
| traditional measures of inflation (E31) | instability in Phillips curve (E31) |
| weighted median inflation does not decline significantly (E31) | understanding inflation behavior (E31) |
| weighted median inflation (E31) | unemployment (J64) |
| weighted median inflation (E31) | stable Phillips curve (E31) |