Instantaneous PCE Inflation and Rivals

Primarily based upon the working paper by Jan Eeckhout (UPF Barcelona), right here’s the PCE inflation price as much as December:

Determine 1: 12 months-on-year PCE inflation (blue), quarter-on-quarter (sky blue), month-on-month (black circle), and instantaneous inflation (a=4) (daring purple), all annualized. NBER peak-to-trough outlined recession dates shaded grey. Pink dashed line at 2%. Supply: BEA and writer’s calculations.

Observe that the instantaneous price (a=4, tau=12) tracks the Q/Q inflation price fairly nicely.

The instantaneous inflation price upweights the latest statement. How does this evaluate with various measures that try to trace traits.

Determine 2: Instantaneous PCE inflation (a=4, tau=12) (daring purple), Q/Q inflation (tan), 16% trimmed imply M/M inflation (sky blue), and core M/M (purple), all annualized. NBER peak-to-trough outlined recession dates shaded grey. Supply: BEA and writer’s calculations.

Curiously, neither core m/m nor trimmed imply m/m tracks notably nicely instantaneous inflation (a=4, tau=12); totally different values of a may result in totally different outcomes (a=infinity is full weight on most up-to-date statement, a=0 is equal weights on all tau statement, a=1 is linearly declining weights).

What’s clear is PCE inflation measured with excessive weight on the latest statement is declining, as I famous on Marketplace on Friday.