Inflation Factors

Thomas M. Menino Convention & Exhibition Center 

We propose a novel framework to identify inflation factors that provide
timely estimates of supply and demand conditions shaping goods- and services-related
inflationary pressures. These factors are estimated from disaggregated Personal Consumption
Expenditures (PCE) data on prices and quantities, using a new Sign-Restricted
Dynamic Factor Model (SiR-DFM). Aggregate PCE inflation is then broken down
into the contributions of common factors—encompassing goods demand, goods supply,
services demand, services supply, and inflation expectations—and consumption
category-specific—that is, idiosyncratic—components. By implementing a series of
validation exercises, we show that the estimated inflation factors provide an informative
and coherent narrative of inflation dynamics and can be used for forecasting and
policy analyses.

Inflation Expectation

Sign-Restricted Dynamic Factor Model