TY - BOOK ID - 101235171 TI - What is Keeping U.S. Core Inflation Low : Insights from a Bottom-Up Approach AU - Abdih, Yasser. AU - Balakrishnan, Ravi. AU - Shang, Baoping. PY - 2016 SN - 1498347290 1475535015 1475533772 PB - Washington, D.C. : International Monetary Fund, DB - UniCat KW - Consumption (Economics) KW - Inflation (Finance) KW - Statistical methods. KW - Econometric models. KW - Finance KW - Natural rate of unemployment KW - Deflation KW - Economic Development: Urban, Rural, Regional, and Transportation Analysis KW - Forecasting and Other Model Applications KW - Housing prices KW - Housing Supply and Markets KW - Housing KW - Import prices KW - Imports KW - Income economics KW - Inflation KW - Infrastructure KW - Labor KW - Labour KW - Macroeconomics KW - Model Construction and Estimation KW - Model Evaluation and Selection KW - National accounts KW - Price Level KW - Prices KW - Prices, Business Fluctuations, and Cycles: Forecasting and Simulation KW - Property & real estate KW - Real Estate KW - Saving and investment KW - Unemployment KW - Unemployment: Models, Duration, Incidence, and Job Search KW - United States UR - https://www.unicat.be/uniCat?func=search&query=sysid:101235171 AB - Over the past two decades, U.S. core PCE goods and services inflation have evolved differently. Against the backdrop of global concerns of low inflation, we use this trend as motivation to develop a bottom-up model of U.S. inflation. We find that domestic forces play a larger role relative to foreign factors in influencing core services inflation, while foreign factors predominantly drive core goods price changes. When comparing forecasting performance, we find that both the aggregate Phillips curve and the bottom up approach give low root mean square errors. The latter, however, is more informative in tracing the effects of shocks and understanding the exact channels through which they affect aggregate inflation. Using scenario analysis—and given a relatively low sensitivity of core inflation to changes in slack, both at the aggregate Phillips curve and sub-components levels—we find that global pressures will likely keep core PCE inflation below 2 percent for the foreseeable future unless the dollar starts to depreciate markedly and the unemployment rate goes well below the natural rate. These results support the accommodative stance of monetary policy pursued thus far and, going forward, underscore the need for proceeding cautiously and very gradually in raising the federal funds rate. ER -