Is core CPI inflation in a new regime? Results using a Markov switching model (pioneered by James Hamilton).
Figure 1: Core CPI inflation m/m in log differences (blue). NBER defined peak-to-trough recession dates shaded gray. Source: BLS, NBER, and author’s calculations.
Applying a simple Markov switching 2-regime estimation method (implemented in EViews, using default settings, allowing for different variances) over the 1960-2022 period yields the followin estimate.
This estimate yields the following estimates of regimes (filtered, smoothed):
The estimates indicate a 30% probability of being in the low inflation regime. The results are somewhat sensitive to assumptions regarding the variances in the two regimes. Imposing a restriction of common variances leads to the following estimated probabilities of being in the two regimes.
Imposing the restriction of common variances, the indications are much stronger for a switch to the low inflation regime.
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