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Does inflation come and go in the same way?

Author

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  • Juhana Hukkinen

    (Monetary Policy and Research Department of Bank of Finland)

  • Matti Viren

    (Monetary Policy and Research Department of Bank of Finland & Economics Department of University of Turku)

Abstract

The failure to predict the surge in inflation in 2021 raises questions about whether we are better equipped to anticipate a future decline in inflation. What tools do we intend to use for predicting the trajectory of inflation? Are we still primarily relying on survey data regarding inflation expectations, and are we still employing a Calvo-type structure to model inflation, in which only the intensive margin (the size of price increases) adjusts in response to changes in demand and supply? We would like to emphasize that our highly disaggregated consumer price data for the Euro area, consisting of 280 commodity categories, strongly suggests that price increases (inflation) are influenced not only by aggregate trends but also by sector-specific developments that result in state-dependent price adjustments. These factors may lead to more volatile fluctuations in the inflation rate. Furthermore, these reactions do not appear to be entirely symmetric when it comes to rising and falling inflation. When the inflation rate is close to zero, the role of state-dependent pricing is diminished, and nonlinearities become less significant.

Suggested Citation

  • Juhana Hukkinen & Matti Viren, 2023. "Does inflation come and go in the same way?," Discussion Papers 163, Aboa Centre for Economics.
    • Handle: RePEc:tkk:dpaper:dp163
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    More about this item

    Keywords

    inflation; state-dependent pricing; menu costs;
    All these keywords.

    JEL classification:

    • D22 - Microeconomics - - Production and Organizations - - - Firm Behavior: Empirical Analysis
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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