Inflation is volatile based on monthly changes. The variation away from an average monthly equivalent will be large with most of the negative spikes since 2000. The current monthly PCE changes are persistent and getting larger. The recent higher trend takes us back to a 2% trend for the last ten years. The PCE price index grew only 1.38% from January 2012 to February 2020. The last two years have seen a growth rate of 4.2%.
The researchers at the San Francisco Fed have looked at the persistence of inflation levels and changes. See "Untangling Persistent versus Transitory Shocks to Inflation". Both are moving higher after a period of low correlation. This information can be used to describe transitory and persistent inflation. Transitory inflation is a shock away from a longer-run value with a shift in the longer-run value over time. A persistent shock is one that shifts the longer-run value. This can be seen through the correlations of levels and changes. A high correlation of inflation levels shows persistence. A high correlation with inflation changes, less negative, shows that transitory inflation is low.
A shock volatility is the ratio of level and change persistence. The shock volatility ratio is the standard deviation of persistent shocks divided by the standard deviation of transitory shocks. A level above one says that persistence shocks are more volatile than transitory shocks. We saw high levels in the last decade, but the overall inflation was low. We are now seeing persistence at higher inflation levels.
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