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Understanding U.S. Inflation During the COVID Era
Author:
Laurence M. Ballnull

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,
Mr. Daniel Leigh
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Ms. Prachi Mishra
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Series:
IMF Working Papers
Volume/Issue:
Volume 2022: Issue 208
Language:
English
Publication Date:
28 Oct 2022
DOI:
https://doi.org/10.5089/9798400225390.001
ISBN:
9798400225390
ISSN:
1018-5941
Pages:
61
Keywords:
Inflation; Covid; Fed project; unemployment path; Fed's target; inflation gap; inflation expectation; Unemployment rate; Unemployment; Labor markets; COVID-19; Baltics
Legal-disclaimer:
IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.
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This paper analyzes the dramatic rise in U.S. inflation since 2020, which we decompose into a rise in core inflation as measured by the weighted median inflation rate and deviations of headline inflation from core. We explain the rise in core with two factors, the tightening of the labor market as captured by the ratio of job vacancies to unemployment, and the pass-through into core from past shocks to headline inflation. The headline shocks themselves are explained largely by increases in energy prices and by supply chain problems as captured by backlogs of orders for goods and services. Looking forward, we simulate the future path of inflation for alternative paths of the unemployment rate, focusing on the projections of Federal Reserve policymakers in which unemployment rises only modestly to 4.4 percent. We find that this unemployment path returns inflation to near the Fed’s target only under optimistic assumptions about both inflation expectations and the Beveridge curve relating the unemployment and vacancy rates. Under less benign assumptions about these factors, the inflation rate remains well above target unless unemployment rises by more than the Fed projects.
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Cover IMF Working Papers
IMF Working Papers
ISSN:
1018-5941
Publisher:
International Monetary Fund
Volume 2022: Issue 208