Understanding Trend Inflation Through The Lens of The Goods and Services Sectors

We distinguish between the goods and services sectors in an otherwise standard unobserved components model of U.S. inflation. Our main finding is that, while both sectors used to contribute to the overall variation in aggregate trend inflation, since the 1990s this variation has been predominantly driven by the services sector. We pinpoint two key changes in sector-specific inflation dynamics which led to our main finding: (i) a large fall in the volatility of trend goods inflation; and (ii) the disappearance of comovement between trend goods and trend services inflation. Our results are robust to inflation developments associated with the recent Covid-19 pandemic