Daniel Leigh, Prachi Mishra, Laurence Ball
Why did US inflation surge and where is it heading? This column decomposes the surge into a rise in core inflation, measured by weighted median inflation, and deviations of headline inflation from core. The rise in core mainly reflects the tightening labour market, as captured by the ratio of job vacancies to unemployment, and pass-through into core from past headline inflation shocks. The headline shocks largely reflect increases in energy prices and supply chain problems. Estimates suggest that inflation is unlikely to return to target unless the unemployment rate rises well above the 4.4% peak level the Fed currently projects.