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Inflation Dynamics: Dead, Dormant, or Determined Abroad?

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Inflation Dynamics: Dead, Dormant, or Determined Abroad?

Brookings Institution,

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Conventional inflation models are dead – so long live inflation!

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Editorial Rating

7

Qualities

  • Analytical
  • For Experts

Recommendation

Inflation’s quiescence around the world remains an economic conundrum. In this scholarly report, economist Kristin J. Forbes looks at how inflation dynamics have changed since the 2008 financial crisis and details why standard inflation models have been missing the target. She points to globalization as the missing link. Although its subject can be daunting to nonexperts, this study clearly explains a topic that is gaining more attention among economists, executives and analysts.

Summary

Inflation models have become less reliable.

On the heels of the 2008 financial crisis, traditional models predicted a steeper drop in consumer price index (CPI) inflation than occurred. And the recovery since then has not brought about projected price rises. So are the models wrong?

One possible reason for the divergence between actual inflation and model expectations is globalization. Modeling usually looks at local factors such as unemployment and includes an allowance for import prices. But adding more global determinants improves the results.

Taking global factors into account may help economists better understand...

About the Author

Kristin J. Forbes is a professor of economics at the MIT Sloan School of Management.

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    J. P. 3 years ago
    Is there a working model for this? It would be nice to see a back test to determine current reads on inflation as well as potential impacts for determining forward outcomes.