Milton Friedman famously said that inflation is always a monetary phenomenon, meaning that rises or falls in the money supply accounted for increases or decreases in inflation. It may be a little more complex than that, but the relationship still appears to hold true. Economists have identified other correlations or potential causations. This paper is a follow-up to a similar one written by the same group. It identifies three factors the authors believe are associated with inflation. One is the long-term expectations of consumers. The second is the job openings to unemployment ratio. The third is relative large changes in prices in specific industries such as energy or autos. In the original paper these factors were said to be most closely linked to the inflationary era culiminating during the epidemic. The new paper examines whether they are also related to the decline in inflation since the peak.
It finds that the same factors appear to have driven the decline in inflation, both in “core” measures in specific items with large swings. The first factor is the hardest to explain, but it may be that consumers as a whole have some collective knowledge about likely coming price increases or decreases. It makes sense that when there are more job openings than unemployed people, wages may rise more substantially, contributing to inflation. And items that contribute heavily to overall consumer spending, like gasoline, electricity and other energy needs, cars, food and shelter, can influence both inflation expectations and inflation when those items experience sharp up or down price changes. (NBER Paper)
The paper provides a good grounding in understanding the dynamics behind inflation and factors to track to see where it might be heading. It seems to me that we will see a relatively stable inflation rate, although tariff issues could change that outlook.
