The Federal Reserve Board published a research note assessing whether the recent disinflation in the United States, the euro area, Canada, and the United Kingdom reflects a temporary normalization or a change in the underlying inflation process. The analysis finds that inflation remains unusually widespread across categories and that the pre-pandemic relationship between aggregate inflation and diffusion indexes measuring the breadth of price changes has weakened, particularly in how deflationary categories translate into lower aggregate core inflation; persistent, broad-based services wage growth is flagged as a potential contributing factor. Using diffusion indexes that track the share of consumer price index subcomponents with annual inflation above 3 percent, between 0 and 3 percent, or below 0 percent, the note shows that inflation breadth remains elevated relative to 2014–2019, with deflation less common than before the pandemic. A pre-2020 benchmark (2000–2019) indicates a strong historical link between inflation and the diffusion tails, including models where diffusion measures explain about 80 percent of core inflation movements in the euro area and roughly 50 percent in the United States, but out-of-sample residuals since 2020 remain persistently positive on average even as core inflation has moderated, especially for the below-0-percent tail. Decomposition by major components points to non-housing services as the main locus of widespread price increases across all four economies, with housing services a larger contributor in the United States and Canada and goods pressures more prevalent than pre-pandemic in North America. For the United States and Canada, wage diffusion indexes show a substantial share of industries with wage growth above 3 percent, particularly in services, aligning with the breadth of services inflation. The note cautions that different approaches to measuring inflation breadth could yield different conclusions and that more data will be needed to judge whether the apparent shift is lasting, while noting that the results do not imply central banks cannot achieve 2 percent inflation objectives.
Federal Reserve Board 2026-03-30
Federal Reserve Board research suggests post-pandemic inflation remains unusually broad-based and the inflation diffusion relationship has weakened
The Federal Reserve Board published research on whether recent disinflation in the United States, euro area, Canada, and United Kingdom reflects temporary normalization or a change in the inflation process, finding inflation remains unusually broad-based and the pre-pandemic link between aggregate inflation and diffusion indexes has weakened. It highlights persistent non-housing services price and wage pressures, especially in North America, and that diffusion-based models now systematically underpredict core inflation. The note cautions that alternative measures of inflation breadth may yield different results and that more data are needed to determine whether the shift is lasting, while stressing this does not imply central banks cannot achieve 2 percent inflation targets.